Child's Antiwar Radio Chaos in Austin, Texas, streaming live worldwide on the internet at chaosradioaustin.org and at antiwar.com slash radio.
And I'm happy to welcome back to the show Robert P. Murphy, Ph.
D.
He runs the website consultingbyrpm.com.
He's a fellow at the Mises Institute.
He's the author of the Politically Incorrect Guide to Capitalism and the newer and very interesting Politically Incorrect Guide to the Great Depression and the New Deal.
I don't mean to imply that the Politically Incorrect Guide to Capitalism was any less captivating.
I love them both.
Welcome back to the show, Bob.
How are you doing?
I'm doing pretty good, Scott.
Thanks for having me.
I really recommend those, especially to liberals who like being challenged and stuff.
Read that Politically Incorrect Guide to Capitalism.
Read the Politically Incorrect Guide to the Great Depression and the New Deal.
It's not like they're written by some warmonger.
It's Bob Murphy, and you're against the empire, right?
I certainly am.
And what's funny is that even people, other so-called conservatives that are for limited government and lower government spending and so on, how in the world could you be for the American war machine if you're for limited government and lower spending?
Yeah, of course.
That makes no sense whatsoever.
But then again, that's what it means to be a conservative, is to hold contradictory principles all the time really loud and denounce everyone else as a traitor who ought to be tortured.
But that's all they're left with, poor guys.
So, well, let's talk about the cost of the empire.
Let's talk about the role of the central bank in the American empire.
Now, Ron Paul, who I know you're from the very same Austrian school of economic theory that Dr. Paul subscribes to, he says that basically the empire would not be able to wage these continual wars without the ability or without the Federal Reserve central banking system, which gives them the ability to print money and make the wars seem like they're going to be free at least at first, something along those lines.
How does that work, Bob?
Well, historically, I mean, it's clear this connection between war making and inflation that, for example, in World War I, all of the major belligerents except the United States went off the gold standard.
And so really it was World War I that destroyed the gold standard as the international monetary arrangement.
And that, of course, paved the way for massive inflation.
So the basic problem the government faces during a war, they need to spend ridiculous amounts of money and they can only raise so much through taxes or through borrowing.
And so it's a really cheap, easy fix for them just to run the printing press.
And that way, they're still, of course, sucking resources away from the private sector.
But it's not as obvious to the people what's happening because they just see prices going up.
And so the government can blame evil speculators or war profiteers.
And people don't make the connection between the inflation of the printing of currency and the rising prices.
Well, and in fact, so many Americans were led to believe that they were the beneficiaries of all this because one of the prices that kept going up was their house, something they actually own, even if they don't own their own business, their own factories and whatever.
They own their own house.
And so the price is going up, making them rich.
Let's refinance and buy a new boat and a big screen TV.
Right.
So you're referring to the recent housing boom, and that's true that what happened, it was after the dotcom crash, Alan Greenspan citing his desire to give the economy a soft landing.
He cut interest rates down to one percent by 2003.
And as you say, that helped to fuel a boom in housing prices.
And so what's funny is if you look at certain other indicators, you know, lots of people have been warning about it for a while, that the U.S. was importing a lot more than it was exporting to countries, especially China.
And you say, you know, well, is that sustainable?
And it seemed to be at the time because these foreigners, what they were doing is they were sending us goodies, you know, television sets, radios, computers and so on that they were manufacturing.
And in exchange, they were acquiring larger and larger holdings of U.S. debt.
And so, you know, if the U.S. were going to continue to be really prosperous and productive and its real economy kept expanding, that might have been sustainable.
But obviously, we know in retrospect now that that was really just an illusion.
And really, the U.S. was just basically running up its own credit card.
Well, now, if I try to remember back how it was around the time of the Bush Gore fiasco and the beginning of the Bush administration there, you know, in 2000, 2001, he inherited a recession.
George Bush made sure to explain to us over and over again, even before taking power.
Now, everybody remember now, we're already in a recession.
I just got here.
And yet, it seems like the politics at the time, I don't remember the exact dates and what have you, but even before September 11th, he was doing this gimmick with the stimulus checks and everything, right, and trying to stimulate the economy to make it go.
And then maybe it's only speculation or maybe this has actually been reported in the Wall Street Journal somewhere or something.
But clearly, right, after September 11th, the presidency and the Federal Reserve System had a conversation that said, we're not going to suffer the consequences, the recession we're already supposed to be in, plus an attack on downtown Manhattan.
You are going to turn on the money machine, pal.
And Greenspan said, yes, sir, boss, right?
Yeah.
I mean, like you say, I don't know that there was, that I can point to specific transcripts of what happened, but I mean, if you look at the public statements at the time, Greenspan certainly was out there to let the financial sector know, don't worry, this is not going to interfere with business as usual, I'm going to do everything in my power to make sure we get through this.
And especially the 9-11 attack itself, if you look at what happened to the Federal Reserve balance sheet and the monetary base and those types of indicators, there was a huge spike right after the September 11th attack when Greenspan just wanted to make sure the world knew, don't worry, you don't need to ditch your dollars, the U.S. is still open for business, because everyone, of course, was concerned about the attack being right on the financial center.
But then even beyond that, so he had this huge spike, and then he sucked some of that away once the initial panic subsided, but you're right, I mean, he flooded the markets with money and kept interest rates incredibly low, such that now many people, not even just Austrians like Ron Paul and Peter Schiff, but even mainstream commentators are now, when you ask them, what do you think caused the housing boom, one of the first things they'll say is, oh, the low interest rates of Alan Greenspan.
So that's now become actually one of the conventional explanations for what happened.
Yeah, and congratulations on that, I mean, that's in no small part due to what's really a fairly small core of Austrian school economists.
That's not the Chicago school line or the Keynesian-Princeton argument, right?
That's the Austrian school theory entering into finally being an accepted part of the mainstream discussion there.
Well, yeah, Scott, you're right, and it really is, it's almost like it's happening so fast and you just take things in stride when they're happening in real time, but occasionally it really does hit me that, wow, this is incredible, I mean, just the fact that people like Ron Paul or Tom Woods, I know you're familiar with, you know, they go around and give speeches and when they talk about the Federal Reserve, I mean, the audience of young people just gets visibly upset and they start, you know, applauding lines to end the Fed and so forth, and that just, even three or four years ago, nobody really knew what the Federal Reserve was, you know, it was just this very dry, boring institution that nobody cared about, and now all of a sudden you've got, you know, Bernanke trying to do damage control and trying to basically do a PR campaign to show how good the Fed is.
So it's really, I think you're right that Austrian school economists were the ones who really led this, so they were against the Fed before that was trendy, and really pointed the finger at the central bank and said, you know, all these liberals who are suspicious of power and authority and suspicious of rich bankers and so on, you know, look at the Federal Reserve, what is that?
That's a cartel of bankers that controls the money supply, I mean, if you're suspicious of power and money, look at the Fed.
Well, sure, and you know, I first learned all about central banking from reading J. Edward Griffin's book, The Creature from Jekyll Island, years before I ever heard of Rothbard, which is funny because he's in the footnotes all throughout that book, I just never, you know, figured out I needed to go to the original source there, but in Griffin's book, there's just no question as to whether the central bank is tied together, one and the same thing, with the warfare state, I mean, the men who created the Federal Reserve were the men who got us into World War I, and it's been like that, I mean, this is the center of the American establishment, this is how the richest among us, the guys who run Citigroup and Goldman Sachs and all these companies, Merrill Lynch, this is how they control the state, is basically through the central bank, and could they have ever paid for World War I, World War II, the entire Cold War, the arms race, and the space race in Korea and Vietnam, and all our thousand bases around the world, if they didn't have a money machine?
Could they have just, for example, said to the American people, okay, we're raising your taxes to 70%, because that's what it's going to cost for you to pay these bills?
No way.
Yeah, you're exactly right, and that's, of course, the whole reason for doing it, I mean, when I give talks to various audiences, I try to get them to see the picture here, and I say, you know, if you had a printing press in your basement, wouldn't you want to use it?
Would you trust yourself to not use a printing press, and of course not, I mean, the temptation would be inconceivable, and so then if you give literally a printing press over to the hands of people who are the sorts of people running the government and who are the ones backing politicians and so forth, I mean, these are not principled people who are out for the common guy, the little guy, so clearly, yeah, they're going to use this machine to fund their efforts, and whatever amount of taxation and borrowing the public would put up with, they can just, the people in charge can just spend and siphon off that many more resources if they have a printing press at their disposal.
Well, and the other thing is, too, is they can bribe you off with your favorite social program so that, you know, someone who is so sick and tired of war that they're ready to see Washington, D.C., you know, sink into the swamp and, you know, go away forever and ever, all of a sudden, you know, their printing press is helping me pay for college and helping pay my medical bills and taking care of business, and geez, where would we be without the state?
And so, opposition to them, you know, becomes watered down as well.
Yeah, you're right, and beyond that, too, it also plays into their hands perfectly because with the massive price inflation, it just takes away one more option that private citizens have to provide for their own future, and so, you know, right now, you really don't know if you're trying to, let's say you're 40 or 45 years old and you're trying to, like, handle your retirement, I mean, you know Social Security, you can't count on that, and now you can't trust the stock market, you don't want to put all your money in stocks, you can't trust real estate, and you certainly aren't going to just put a bunch of $100 bills, you know, in a safe in your house somewhere because you know that's not going to be worth anything, so by having this threat of, you know, constant erosion of the purchasing power of the dollar, the government takes away just one more avenue by which people can actually have some stability in their private lives, and that leaves them utterly dependent on the people in Washington.
And again, I just want to rehash and go over how this was George Bush's policy from the time he took office was to stimulate, stimulate, stimulate, everybody's getting a check in the mail for $300, all the pressure is on the Fed to keep the money machine flowing full speed and basically just inflating the bubble bigger and bigger and bigger, because this is war time, and the American people have got to be able to believe that it's okay for them to just continue, you know, spending $35 at the ice cream shop, at the Cold Stone Creamery and going and spending all their money on big vacations at Disney World and all these things, because if they have to go through hard times at the same time we're going through a war, they will oppose the war.
So you know, I mean, it was so clear, and so if you're to now continue to, with your criticism and apply it to the President's administration, it's perfectly clear that all you're criticizing Barack Obama for is for continuing the Bush policy, perhaps ramping it up to a greater degree, but what's wrong with him is he's just like George Bush, he keeps inflating the currency, and it's not just Ben Bernanke, it's Obama, it's the Presidency, the Executive Branch controls the Federal Reserve, right?
Right, or probably even more accurately, whoever it is behind the scenes who influences the President, you know, the people that pay for their campaigns and so on, so, but you're right, I mean, it is, I do have to catch myself occasionally that a lot of times when economists are talking, they'll act as if they're having a personal disagreement with Ben Bernanke, and you're right, I don't think, I think it's very naive to assume that a former Princeton professor is right now in charge of the world's currency.
Right, and we know who Barack Obama's donors are, Goldman Sachs.
Sure, sure.
I mean, it's right there, you can look it up at, you know, opengovernment.com or whatever the hell.
Right, right, exactly, so it's really, you know, the small group of people who are making these decisions behind the scenes, and it's, as you say, it's ironic when people, I mean, it's true that what Barack Obama's doing right now, I don't think it's an exaggeration to say it's the biggest expansion of the Federal Government's power since the New Deal, and that's a very terrifying consideration, and I really do think that the economy's going to be awful, and that, you know, decades from now, they will look back and call this the second Great Depression, but the problem is, or the irony is, when a lot of Republicans get really upset at Obama's socialism, things like that, that, you know, the TARP money was started under George Bush, with Hank Paulson, you know, who was Bush's Secretary of the Treasury, so it's a little bit ironic when a lot of self-described Republicans get so upset about, you know, the socialists we have in the White House, when, like you say, really all he's doing is taking what George Bush started and doubling it.
Right, and of course, again, the reason that there was this giant bubble, or one of the main reasons, at least, that there was this giant bubble that now we're suffering the effects from, is the war that they all championed, and denounced you and me as traitors to America for not championing.
Oh, what, you think we should just wait, Bob, until Saddam Hussein attacks us first?
Remember that?
These are the people complaining about big government now.
Yeah, right.
All right, well, now, wait a minute, let me pick a fight with you here, because when we talked about this, say, in, I don't know, September, November, I said, but Bob, they gotta do a soft landing, you can't just have the entire economy go, you know, completely unravel, where nobody's doing any business with anybody, you gotta have a little bit of counter-cyclical spending here, so that, you know, the catastrophe can be somewhat mitigated, even if it means drawing out the consequences a little bit, it's better than letting the economy unravel so badly that it would take even longer to recover from it anyway, and so, am I wrong that time has borne out my argument against yours, that we've had a soft landing, that unemployment is pretty high, but we haven't had major bank failures all across the country and all that, and if they hadn't done all this TARP money, and they hadn't turned on the printing press, wouldn't J.P. Morgan Chase and Citigroup and Goldman and Merrill Lynch and all these banks have gone out of business, and wouldn't they have taken down thousands of legitimate businesses with them, and wouldn't we have unemployment at 50% and a revolution on our hands?
Well, of course, we never know, we will never know for sure what would have happened in the alternate timeline, but I would say that it's by no means clear that right now all the banks are out of the woods, I mean, I think a lot of people are saying behind the scenes that, you know, now the next shoe to drop is going to be in, you know, the personal credit cards and areas like that, because default rates are on the rise, and that now the, in the real estate sector, that the main problem now is shifting from out of residential into commercial real estate, and that's where people think there's going to be huge losses over the next few months.
So I think all they've really done is pushed back the problem a little bit, and at the cost of increasing the government's debt by, you know, more than a trillion dollars.
And so, I mean, it's just this fiscal year alone, the official estimate is going to be a deficit of $1.8 trillion, and so I think of, and I don't even think that's a rosy scenario, I bet it's going to be over $2 trillion, and so that's just how much they're borrowing in one year.
And, I mean, so it's, and as you say, unemployment now is higher than they were forecasting it would be back before they pushed through the stimulus package.
At the time, they were warning the American people saying, if we don't pass this thing, unemployment might get up to around 9%, and so now the actual unemployment rate is higher than what they were warning as the, you know, the worst case scenario, if we'd step back and did nothing.
And of course, we know that those are the phony numbers that the real, I mean, even the Washington Post said, I think a month and a half ago or so, that the real unemployment rate, as measured by, you know, honest people instead of government employees, is at 15%, and it's been rising since then.
Sure, sure, exactly, and just for your listeners to understand the distinction there, one of the tricks they do now to suppress the unemployment numbers is, what they measure, and they say, who's looking for a job and can't find one, so that person counts as being unemployed, because you know, your retired grandma who's just watching TV, she's not unemployed because she's not trying to get a job, so that's fine, but what they do is, they're neglecting people who have been looking for months, trying to get a job, and just get discouraged and stop actively trying, and then the way the government does its surveys and counts the numbers up, that person is now not considered as part of the unemployed labor force, even though that person would gladly take a job at the prevailing wage rate if he could get one, but he's just been discouraged, so he drops out, so that's one of the tricks, among others, that they use.
Right, alright, now, let's stay back on the point about whether or not this is the second Great Depression.
You say that people are going to look back and say, you know, this is why, all this bogus spending to try to create a soft landing, that's impossible to create, because the, I guess you call them malinvestments, are so badly malinvested and so far off what they really need to be, that this is what is guaranteeing that what could have been a short but painful recession becomes the second Great Depression, and yet, the other argument is, and you know, obviously I'm playing devil's advocate for the state here, I'm an abolitionist man, but what they're saying is, they have prevented a second Great Depression, that's what Ben Bernanke says, he says, look, I don't want to inflate a bunch of money, I want to take all this new money I've created, or at least most of it, and, you know, suck it back into the void, if I can, when it becomes necessary, but hey, if I hadn't have done what I did, the whole thing would have come unraveled.
Now I guess he's basically admitting that it's a Ponzi scheme there, but is it really better to let the Ponzi scheme completely unravel than it is to try to create some kind of soft landing?
If it was you in his position, would you just abolish the thing and resign, Bob?
Well, yes, I would answer your question, but then your earlier question is, you know, with the Ponzi scheme, I mean, suppose Bernie Madoff had said, well, wait a minute, it would be really harsh to my clients if you just make me stop right now and publicize it, you know, why don't you let me, give me another six months and let me try to unwind this thing and try to get as many of my clients their money back as possible, but if you just make me stop today, they're all going to be broke, right?
I mean, most people wouldn't agree with that logic and certainly the clients of Bernie Madoff wouldn't say, oh, okay, well, we'll give you another six months.
Once they realize the nature of what's going on, they immediately want out of it.
And I think it's the same thing with the American economy as a whole, in a sense, it was based on a giant illusion during the housing bubble years and resources, too many workers, too many real resources like lumber and steel and so forth got directed into the housing sector and too many smart people ended up working at Wall Street firms as quants when they should have been studying physics or doing something else with their intelligence.
And so that was a real imbalance in the economy and those things need to get shifted around.
The housing sector needs to fall, you know, Wall Street, financial services sector that needs to contract and the biggest investment firms, the ones that were made the most aggressive bets during the housing boom years, they should go out of business.
That's the way capitalism works, if you take a speculative gamble, if it pays off good, you earn profits and you're rewarded for your foresight, but if it blows up in your face, you have to eat the losses and that's a lesson to you and it's a lesson to your competitors to be more careful next time and the government has simply put the taxpayers on the hook and rewarded the very people who were responsible for the worst excesses of the housing boom.
Alright, so now, well, pretend, try your best to give me the counter-argument.
What would have happened if there had been, if, I don't know, Ron Paul won the primary and then beat Barack Obama on the economic issue and said, I'm the only one who knew this was coming and explain why and you've got to let me have it my way.
So Ron Paul had become the president and somehow it had inordinate influence over the workings of the Federal Reserve System and so we're not going to do anything.
Let them all fail.
Let all these banks fail.
Let all the businesses that have all their savings invested in these banks fail.
Let all the bad investment be liquidated as fast as possible and then let the free market decide how to allocate these resources.
How bad would it be?
Would we have started the recovery by now or would it still be three or five years worth of horrible unemployment rates or, you know, how would it be different, better than what we're dealing with now?
Okay, well, it's a good question.
My thought is that if, it would have been ideal if it had, if Ron Paul had been in charge right when the TARP bailout happened, he could have stopped that because that I think was like the nail in the coffin as far as letting the recovery happen under natural circumstances or having the government really try to distort things and prop everything up.
But if they had let AIG fail, for example, that's a big one that people say, oh, well clearly the Fed had to rescue AIG, then yeah, Goldman Sachs would have been in trouble, a bunch of other big investment banks they might have all gone under, and it would have been really bad for a while.
I don't know how high unemployment would have been.
It possibly could have been 10, 12% the way it's conventionally measured now.
I don't know, but it would have, my claim is that it would have come down sharply soon enough that, you know, it may have been bad for six to nine months, but then we would have gotten through it.
This recession right now, this officially started in December of 2007, and actually I think most people believe that it started earlier, that's just when they officially start the thing.
And so already in terms of post-war recessions, this is on the longer end, and the unemployment rate threatens to keep going higher.
And so when they say that they averted disaster, I mean, it's a little bit odd for them to say that when right now we're still on the road to a disaster.
You know, so it's really the burden of proof is on the people who say this is such a good deal.
They're coming up with all these, you know, terrible stories of what would have happened.
And of course, this is perfectly analogous to what the Warhawks do when they try to justify why they're doing something that's costing a lot of money and is killing people, is that they say, well, if you didn't let us do this, things would have been 10 times worse.
And so, I mean, it's a very clever trick, but it's, you know, there's little proof of that.
What I will say is it's a good thing.
It would have been a good thing for the economy, for those big firms to go under, because what that means is the people right now who would be in charge in the financial sector would be those firms that were relatively cautious during the housing boom years, right?
So there's this misconception that everybody on Wall Street was dabbling in mortgage-backed securities in 2003 and 2004, and that's not true.
Some firms were cautious.
Some people realized, wait a minute, this is a housing bubble.
I don't want to get my firm caught up in this.
And those people right now ought to have huge market share, because they were right.
But they don't have big market share, because their big competitors got bailed out by the government.
Right.
Failure rewarded.
Right.
And so what that means, it's not just a matter of fairness, but also that now the direction of capital, like where funds get invested in Wall Street right now, is determined by the decision-makers who were wrong the last time, and also the ones who are politically connected.
So that's not the way you generate future economic growth.
That's not how the economy rebounds after a downturn, is you want to have people in charge of investing resources and steering capital funds who actually are good at forecasting the future, whereas right now we have the same buffoons in charge who screwed up the last time, and they're the ones deciding where investment's going to go.
All right, now let me ask you this.
I was arguing Austrian theory with a friend who said, you know, it seems like you're basically taking the responsibility off of the people who make the bad decisions, that Austrian economic theory, even though it's the favorite of the individualist libertarians, seems to say that businessmen are fooled by low interest rates into thinking that the good times are going to last forever, and then they make bad decisions, and yet there are managers of good businesses who, like you said, were able to see, well, wait a minute, you know, this is a big bubble, not a good investment, I don't want to do this, I don't want to build 15 new computer-making factories when at some point this growth is going to level off and we need to be prepared for a rainy day, that kind of thing.
It seems sort of like the Austrian theory says, forget all that, no businessmen are supposed to be able to understand that the government's manipulation of the interest rate creates an artificial good time that's going to lead to a bust, they're all, we're supposed to assume, just stupid, even though they're the entrepreneurs of our society, they're not supposed to be able to understand that there's a bust that follows the artificial boom, and so therefore they all are deceived into making all these bad decisions.
Is that, it almost sounds, I'm trying to put myself in liberal shoes, it sounds like maybe it's an apology for a bunch of criminals at Goldman Sachs who are, you know, if you just read Matt Taibbi or whatever, they're simply mugging us.
Right, so it's a good critique, and in the academic literature that goes, it's called the rational expectations objection, that you're right, they say, gee, Austrians are usually so proud of business people for being able to anticipate the future, how come they don't understand that Greenspan was going to raise interest rates?
So, on the face of it, you know, it is a good objection, Austrians in the literature try to deal with that, but let me just clarify one thing, it's not that, you know, no Austrian economist I know would say, oh, Goldman Sachs should be bailed out by the government because it wasn't their fault, they were misled by Greenspan, no, I mean, if you made a bad investment decision with your own money or even with your client's money during the housing boom years, then, you know, we can try to explain your mistake based on Greenspan's fiddling with the interest rate, but as Austrians we say, no, you're still responsible for that loss, the taxpayers don't pick that up, you go out of business if you screw it up.
So it's not, in a sense, excusing any mistakes that those private firms made, but at the same time we are recognizing that to try to understand why were there so many mistakes made systematically, one of the main contributors was Greenspan, and just to give you a quick example of the way, what else was going on in this argument, so if you think about it, I mean, what Greenspan did basically was come on the scene and start handing out money at lower rates than other banks would be willing to lend it for, and so even if you knew that this was kind of phony, if you're someone borrowing money, I mean, the dollar bills that Alan Greenspan gives you are just as good as the dollar bills you're going to get from someone who legitimately, you know, saves out of his paycheck and wants to hand you money as a loan, and so, of course, you're going to go for the cheaper loan, so it's not possible to sort of expect everyone just to, out of principle, not take money when the Fed's injecting new money into the system, that can't help but push down interest rates, and so it's true, businesses should try to anticipate what's going to happen, but they're not omniscient, I mean, the part of the function of market prices is to communicate information, and so what the Austrians are saying, simply, is that when the Fed comes in and just starts showering random amounts of money into the market, that's going to mess up the signal, and yes, businesses try to counter for that, they try to adjust and adjust their behavior, but you can't offset it perfectly if the government's coming in and has, it's like introducing noise to a signal, and yeah, you can try to filter the noise out, but obviously there's less information getting through.
Well, I even remember reading last summer, I think it was, hell, I guess it could have been the summer before last, I think it was last summer, Gary North at LewRockwell.com started writing, hey, hey, hey, they're not inflating, they're deflating, look at the numbers, and he was publishing from the Federal Reserve Bank's thing, where Bernanke, I guess, was trying to maybe slowly deflate the bubble, but he popped that sumbitch, and it wasn't nothing but a couple of weeks later, or a month or so later, that the whole bottom fell out of the stock market.
Right, and so this is, again, for those who are into conspiracy theories, I mean, what Greenspan and then what Bernanke has been doing in particular, he's not obeying any standard school of thought, right, so he's obviously not doing what the Austrians want him to do, but he's also not doing what the Chicago school monetarists want, or even the Keynesians, because he's not being consistent that, as you say, in the summer of 2008, the growth of aggregates like M1 or M2, so in other words, the money supply held by the public, like your checking account balances and the cash in your wallet and so on, that total number basically flattened out in the summer of 2008, which is odd if the whole point was the Fed was supposed to be bringing liquidity into the credit markets and trying to soothe investors, which is what Bernanke said he was doing.
And so a lot of people say that, oh, I think that's why there was this crisis in September that led to the runs on money market funds, and that allegedly was the justification for why they had to rescue AIG and so forth.
And then Bernanke starts increasing the money supply at double-digit rates in the fall and winter of 2008, and now he's hit the brakes again.
So it's not that he's done this consistent policy throughout, he keeps letting the money supply go very quickly, and then he puts on the brakes, and then he lets it grow quickly and puts on the brakes, and so that's why I'm skeptical, I don't know what they're trying to do, but they're certainly not doing what they're telling the public they're doing.
Well, you know, it's very interesting, because he seems very mindful, I guess, as part of the result of the Austrian school theory being part of the conversation more and more.
He's had to address questions from reporters and from other congressmen, and even Jim Lehrer asked him, I think.
And so he's trying to play Paul Volcker, who of course helped take us off the gold standard finally in 71, but then also was the inflation fighter in the 1980s.
And so he's basically kind of trying to preempt Ron Paul and say, no, no, no, look, we're going to, if we start having price inflation very badly, then we'll just soak this money up and kind of undo it.
So he is, as you say, pushing on the gas and then pushing on the brake, and he's kind of worried about whether, you know, how much money to create out of nothing here, at least he's playing like that.
And this is his argument too, Bob, against Ron Paul's bill to audit the Fed, is he said, and it's kind of funny, like he said, here's this guy inflating at double digit rates, but then he turns around and says, listen, Congress would be worse than me.
I need my independence.
We already discussed how, you know, he does what the bankers want and what the White House wants.
But anyway, he needs his independence from Congress because they will never let him deflate.
They will never let there be a correction because they always just got to get reelected in two years and they will always insist that he inflates.
And so he needs to preserve his independence by being unauditable by the General Accounting Office.
What do you make of that?
Well, I think it's the narrow claim is probably true that the one thing that would maybe scare me worse than having a small group of bankers running the money supply is to have Congress run the money supply.
But that's really not a very comfortable choice one way or the other.
I think it would be better if we just got rid of the Federal Reserve altogether.
But I don't think I know.
I don't take Bernanke seriously when he says, oh, the reason I don't want my organization to be audited is because I'm so committed to the sanctity of the U.S. dollars purchasing power.
I mean, that's just absurd.
Since the Fed has been founded in 1913, the U.S. dollars lost something like 95 percent of its purchasing power.
So clearly, you know, the Fed is not about preserving the dollar.
The Fed is not about that at all.
And obviously, what's going on here is Bernanke handed out hundreds of billions of dollars to, you know, his buddies, basically, in terms of the major investment firms and so on, the ones who are holding all of these toxic assets.
They were able to get them off their books, and now the Fed has them.
And also, he's got to be in a position to monetize the debt if and when the Chinese stop soaking up all these deficits, the federal government's running, the only buyer left in the world is going to be the Federal Reserve.
And so, you know, Bernanke needs to have those options open.
And he doesn't want Congress, really, because he doesn't want the public to see exactly who was getting how much of a payoff from the Fed, and so that's why he doesn't want to be audited.
Okay.
Now, I know you've got to go, so I'm going to try to combine my two questions, my last two questions into one here.
The first is about the minimum wage.
They've raised it.
Times are bad.
The minimum wage is low.
People are broke.
I think the total minimum wage is, you know, $17,000 a year or something like that if someone works at minimum wage, so they've raised it.
And there was an argument in the Washington Post and a couple other places that this is a good thing.
This will be stimulative to the economy and will help consumer spending.
And if I remember right, you take quite the opposite view of that in both the Politically Incorrect Guide to Capitalism and to the Great Depression and New Deal.
Why is it that people ought to be accepting lower wages right now, which I think is part of your argument?
And then also, if you can segue that into the stagflation that you're, I know on your website and in your articles at Mises.org, that you're predicting for the next decade or so, like we're going to go through the 1970s-type economy here, malaise, they called it.
Yeah.
Well, sure.
So the first thing I would stress for your listeners is everything the government's doing right now, including the Federal Reserve policies of bringing interest rates low and propping up failing financial institutions, the government spending record amounts of money on construction projects and things like that, they did all those things first under Herbert Hoover and then more so under FDR.
So these are the exact same policies that gave us the last Great Depression.
So that's partly why I'm so pessimistic.
Doing research for the last book, I realized that they really did do all this before.
So this is nothing new that they're doing now.
In particular, what's going on, why did unemployment go up so much under Hoover is because after the stock market crash, he called on all the big business leaders and told them, don't cut wage rates, that that's the worst thing you can do in a depression is to have workers getting a smaller paycheck and then they have less money to spend in this vicious downward cycle.
So at our time, the same thing is going to happen.
Unfortunately, they're not going to be doing it for all wages, but to the extent that unions get more powerful now and they can be able to raise wages in their industries or the minimum wage law goes up and raises wages in certain unskilled areas, that's going to make those laborers more expensive.
And this is economics 101, what happens when something's price goes up, other things equal, you buy less of it.
So if you're an employer and you're already on the ropes because your sales are down and your taxes are going to go up and other things, other regulations are making your life miserable and now the government's coming along and saying, oh, and you have to pay your workers more.
You're not going to go out and hire more workers.
You're going to probably let a few of them go that were marginal to begin with, and you're certainly, like I say, not going to expand and hire more of them.
And so it's not even clear that it does give bigger wage payments in the collective to the worker.
It's true.
Each individual worker who keeps his job might get a bigger paycheck, but not if his hours get cut.
And certainly looking at the total amount of wages the employer pays, it's not obvious that he pays more if the rate goes up.
Well, it seems like then all consumer prices have to go up to compensate, too, and these are the very same people have to then pay those higher consumer prices.
And of course, this is the part where the Fed chairman goes to testify before Congress and says, yeah, any more upward pressure on wages will cause inflation.
Right.
So, I mean, it's very economically destructive, and the last thing you would want is...
So it's true.
If you're a person getting minimum wage and you keep your job, then obviously you benefited from it, that you're getting paid now more than you would have before the increase.
But if you're an unemployed person and you can't find work, the last thing in the world you want is for the government to now make it so that a potential employer has to pay you even more.
So in other words, if you got laid off from your last job and you can't even get a job right now at the old minimum wage, it's just raising the bar that much higher if the government comes along and bumps up the minimum wage.
Well, but is it stimulative to the economy as a whole to try to, you know, kick it in the butt, get it kind of moving some, and then maybe the economy as a whole will be better and those people will end up being able to get a job?
I mean, you know, again, I usually on these economic arguments, you know, the right wingers don't have anything to say except they like torturing people.
So I try to do the left wing devil's advocate kind of thing.
And I think that, you know, during the Depression, you can say, look, you know, they set this minimum wage, say, for minors that were able to unionize and get the very minimal standard of living to even have a life, you know, these so-called free men in the society.
And then so, yeah, maybe there were some other people who couldn't get a job in the mine.
But when the thing was finally healed up, people were guaranteed a reasonable wage to live on, at least there for a while.
And it wasn't a race to the bottom and people getting paid pennies to do a full day's, you know, hard labor.
Yeah, well, when it comes to the minimum wage, my main point that I try to get people to see is, you know, in the really extreme worldview where people think everyone would starve to death if it weren't for the minimum wage, I just ask, well, OK, well, how come so few people right now make the minimum wage?
In other words, why aren't evil, greedy capitalist businessmen paying all of their employees right now the minimum wage when in fact it's actually a small percentage who get just the minimum wage?
Well, most workers in the U.S. get a lot more than what the government mandates is the floor.
And the reason, of course, is competition, that most workers are more productive than what they would deal with the minimum wage would pay them.
And so that's why competition among employers gives them a higher paycheck.
And so that logic of, you know, why someone who has a certain amount of skills in a market tends to get a paycheck corresponding to those skills, that logic is true even for people who are unskilled.
So if someone really is only worth five dollars an hour, if you say that, no, the government or the government says, no, an employer has to pay more than that, then that person is not getting a job.
As far as the stimulus, again, I don't think that that is true because the employer has less money.
Right.
If the employer, even if it were true that it was just a pure transfer from the rich employer to the to the workers, I mean, all you're really doing is taking away money from the employer and giving it to the worker.
So now the employer has less money to invest or to spend on fur coats for his wife or whatever it is.
So it's, you know, even on its own terms, I don't think the argument works.
And like I said, ultimately, I think the real fallacy here is this notion that spending is what drives the economy.
And that's not really true.
It's you need to have production.
So workers getting paychecks and going to the mall to buy stuff that only works if there's stuff that's previously been produced and is sitting on the shelf for them to buy.
So, you know, if we all just had money and we wanted to spend, that's not enough, really.
We have to all go to work and produce stuff so that each of us can have something to consume.
Essentially, it's sort of basically what you're saying is the entire kind of liberal view of economics.
And this is all the Republicans are guilty of it, too.
It looks at, you know, what can simply be described as a two step process and it just skips the first step.
And it just sees this is what they always say on TV news since I was a little kid.
Consumer spending drives the economy.
That's what it's all about, is people going shopping.
That's what George Bush said.
Go on vacation, go shopping, go to Disney World, spend your money, keep it going.
You're right.
So this isn't a Democrat thing.
This is Republicans are guilty of it, too, because the Republicans, you know, usually they'll give it a tax cut spin.
They'll say, oh, we're cutting taxes.
But the reason they think that's good is they say because now people will keep more of their money and they can go spend that.
And so they're Keynesians just as much as the liberal Democrats are.
They think that spending money, consuming per se, is what drives the economy.
And no, that's not true.
As you say, there's two steps involved.
Consuming is the fun part.
It's easy to enjoy something that exists there, to consume it and to, you know, have it, go to the store and get something.
That's fun.
The hard part is to go into work and earn the money to go buy something.
And the stuff that you want to consume, obviously, I mean, it's such an elementary point, I feel funny saying it, but it should need to be repeated.
You can't go out and buy something unless somebody else has gone to work to produce it in the first place.
And so when you raise the minimum wage, what that does is it messes up the allocation of labor.
Fewer people now have jobs.
And so there's less total stuff being produced because now people are put out of work.
And so you don't you don't make the economy more productive by having some people lose their jobs.
That makes the economy less productive.
All right.
Now, you mentioned credit cards being in default.
And of course, there are a lot of houses that their mortgages are set to to reset over the next few years and so forth.
You talk about a second Great Depression.
How pessimistic are you really?
Like this sounds like a real collapse coming, you think, I guess, in a little slower motion due to all this inflation.
But nonetheless, huh?
That's right.
I am.
I am very pessimistic.
I don't think unemployment is going to get up to 25 percent the way it did in 1933 because there were very particular things going on back then.
And one of the key differences that you mentioned is this time around, they're pumping money in from the outset, whereas the last time they were still on the gold standard under Hoover.
And so the Fed, even though it cut interest rates down to record lows and did all sorts of other measures to prop up institutions, they couldn't just run the printing press like crazy because they were still tied to gold.
Whereas this time around, there's no such constraint.
So yeah, I think that the real economy is going to be awful for the next several years, meaning that in terms of how much stuff is the U.S. economy actually producing, that's going to be stagnant for years.
And then on top of that, I'm very concerned about large price inflation.
I think we're going to see the worst rise in consumer prices that perhaps in U.S. history, I think, definitely worse than the 1970s.
So yeah, I think you're going to see high unemployment combined with high price inflation, what was called stagflation.
And what really bothers me, maybe I'm right, maybe I'm wrong, but a lot of commentators are acting as if what I'm predicting is impossible, that they're saying things like, oh, well, with high unemployment, there's no pressure on wages, so the inflation's impossible, or we have excess capacity, so inflation's impossible.
But the 1970s proved that you could have stagflation, or right now in Zimbabwe, they have ridiculous price inflation, and they have high unemployment, so people who are telling you that we can't possibly have inflation because there's a bad recession on, they don't know what they're talking about.
Of course you can have both at the same time.
We had it here in the 70s, and they have it right now in Zimbabwe.
And you know, it's funny, because I thought that even in the public discourse, you know, the New York Times editorial page or whatever, that in the 1970s it was kind of generally accepted that, oh, well, jeez, I guess here's a big hole in Keynesian theory, because here we have stagflation that supposedly could not exist, and yet here we are.
Yeah, you're right, and partly it's probably because I tend to hang around with other free-market economists who typically don't like Keynesianism, so maybe we're all just sort of congratulating each other.
But yeah, before this crisis hit, you know, let's say three to four years ago, and any time earlier than that, I thought the conventional wisdom among most academic economists was that old-school Keynesianism said that stagflation wasn't possible, because again, you know, the Keynesians say, why do you have a recession, why is unemployment high, it's because there's not enough aggregate demand, there's not enough spending.
And so you couldn't have prices rising if people aren't spending, that's what the Keynesians thought.
So clearly they thought there was a trade-off, that you could have either high inflation and low unemployment, or you could have high unemployment and low inflation, and the Fed could fight one or the other, but you would never have both problems at the same time, because that was supposed to be impossible.
And so the stagflation that we had in the 1970s, we all thought, you know, refuted that theory, it showed that yes, Keynesianism must be wrong, and at least a simplistic Keynesianism.
But this time around, it seems those lessons were forgotten, I don't know if it's really just that actually a lot of economists didn't learn that lesson, or now they've forgotten it, but I've seen plenty of people, and not even just economists like Paul Krugman, I even mean like free market guys, saying statements to the effect that, well, I'm not worried about inflation any time soon because unemployment's so high, when, you know, I would have thought those people would remember that, didn't we have stagflation in the 70s, but didn't that prove that this analysis is wrong?
Yeah, well, welcome to my world, saying the same obvious thing over and over again and people still not getting it, and all other arguments being based on the false premise that you had already refuted for the rest of your life.
That's the way it is, I guess, on peace and on economics in this society, anyway.
Yeah, I think you're right, and it is funny, too, how really a lot of people in this country like to make this huge right-left distinction, but as we see in practice, the policies of the allegedly far-right George Bush administration really aren't that much different from the allegedly far-left Obama administration.
We're both, you know, hip-deep in foreign wars and, you know, having huge bailouts for bankers and racking up tons of debt on the taxpayer.
Yeah, well, and there we get to the solution to the high unemployment rate.
We just need to get into a major war and conscript people by the millions, and that'll really save the economy by driving the unemployment rate down like World War II.
Well, right, I mean, that's probably the most just evil, I guess, misconception about what happened during the Great Depression, is a lot of people think that, yeah, it was ultimately World War II that got us out of it, and that, of course, it's wrong economically.
You don't help an economy by taking resources and turning them into tanks and bombers and blowing them up.
That doesn't make you richer, and the reason unemployment rates dropped, like you said, is a simple fact.
They drafted a bunch of men and shipped them across the ocean, so yeah, that is one way to reduce this statistic called unemployment, but that's certainly not a sign of a good economy.
All right, well, I sure am glad to have you around.
Thanks so much for this, Bob.
Thanks for having me, Scott.
All right, everybody, that's Robert P. Murphy.
The website is consultingbyrpm.com.
He's a senior fellow, of course, at the Ludwig von Mises Institute at mises.org.
He's the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to the Great Depression and the New Deal, both of which I highly recommend.
You could get through them both in just a few days' worth of trips to the bathroom, and it would be great.
