Alright, y'all, welcome back to the show.
It's Anti-War Radio.
I'm Scott Horton.
And our next guest on the show today is Bob Murphy.
He keeps a blog at consultingbyrpm.com.
He's a senior fellow at the Ludwig von Mises Institute and he's the author of the Politically Incorrect Guide to Capitalism and the Politically Incorrect Guide to the Great Depression and the New Deal.
Welcome back to the show, Bob.
How are you doing?
Thanks for having me, Scott.
I'm doing well.
Good, good.
I'm happy to have you here.
Now, I know that you're aware, because I think I saw you put up something on your Facebook page about it or something.
Somehow I know that you're aware that somebody put out a fake Paul Krugman quote on a fake Paul Krugman Google Plus account the other day saying, hooray for the earthquake, and if only the earthquake had been worse, then that would be an even better stimulant to the economy.
And everybody piled on.
And then the big joke was, okay, he didn't say it, but it sounds like something he would have said.
But here's my thing about it.
I was reading in the comments, and there was a couple of people in the comments, one particularly, who was defending who he also mistakenly thought was Paul Krugman's position here, even though apparently it was someone just making fun of him.
A guy named Horton, actually.
And he was going through and arguing with these guys, and he said that the broken window fallacy is a red herring, because yes, it's true that a bunch of wealth is being destroyed by the earthquake, but that's not the point.
The point of the good of earthquakes for the economy is that it demands the movement of money from the vaults where the rich people are sitting on it, or say, spending it on fancy red sports cars and stuff, and it puts it and moves that money into the pockets of working class people who then that increases their demand, and that increases supply down the chain, and it's stimulative to the economy.
Like a kickstart in a car, you've got to get it going with some of this stuff.
So I was wondering whether he was right, that the broken window fallacy was a red herring, and then further, whether he was right that something like an earthquake could be stimulative to the economy for that reason, that it moves money from rich people's vaults to working people's pockets.
Well, you're right.
You covered a lot of ground there, and it's true.
So what that guy in the Google Plus account said, so yeah, he's come forward and has screenshots that only the person who owned the account could be able to produce, so it looks like it really was a hoax.
It wasn't Krugman, and it was some, I think, unemployed college graduate or something.
But the quote he attributed to Krugman was pretty innocuous.
It didn't even say, I wish the earthquake had done more damage.
He said something like, you know, people are making jokes about this on Twitter, but actually in all seriousness, if the earthquake had done more damage, that would have stimulated more spending, which would have boosted economic growth or something like that.
So the fake Krugman quote didn't say, I wish it had been worse, it was just stating a neutral fact.
And you're right, Krugman should agree with that.
He's gone on CNN to recently talking about, if there was an alien invasion hoax, that would be a good thing.
So I mean, it's not like Krugman's afraid of making controversial statements or things that would leave him open to criticism.
Well, he said that about earthquakes and typhoons and disasters in the past, right?
Right, yeah, immediately after the World Trade Center attacks, he said that as ghastly as that attack was, it actually didn't damage that much in terms of the physical infrastructure, and he said naturally it will have two good economic effects.
On the one hand, it will cause businesses to invest more, because they have to rebuild the buildings, and it might stimulate Congress to get off its butt and spend more money, which is what we need in this recession.
So he clearly said that after the Japanese tsunami, he said that as bad as this thing is in terms of a human tragedy, it might do some economic good.
So we're not putting words in his mouth.
I guess technically the hoaxer was putting words in his mouth, but they were quite accurate words to be putting into his mouth.
And what's also funny is Krugman himself didn't actually explicitly say, I disagree with that statement.
He just was getting all self-righteous about, I can't believe these right-wingers are stooping to such lows to discredit me.
But he didn't actually come out and say, I don't endorse that statement, because he couldn't, because he does endorse that statement.
It's consistent with everything he's written on this topic.
Now, the guy you mentioned, and that's the other thing too, like you say, before it was obvious that it was a hoax, Krugman's defenders on the Google Plus account, many of whom thought that it really was him, were saying, yeah, this is totally right.
You free marketeers are crazy.
You know, this is a perfectly accurate statement.
He's not pining for destruction.
He's just stating a fact that if we had to rebuild, that would cause people to spend more.
And since Keynesians think the problem right now is that people aren't spending enough, well then, yeah, in their mind, oh, you would spend more and that would generate jobs.
So you have, look, it's a trade-off.
But, yep, property is destroyed, but at least it gets people back to work.
And from the Keynesian view, that's a good thing.
So you have to weigh the pros and the cons.
But then, so all things being equal, I don't know, say a government project was to rebuild some ghost town out west or something like that.
Is that stimulative to the economy, moving money from rich people's vaults to workers' pockets and all that?
Is he basically right in a sense then?
Oh, well, okay, sorry.
No, I don't think it's right.
I mean, it's true you might be able to boost the official GDP figures or something, or you might be able to create jobs in certain sectors.
I mean, that is true.
So if that's what your goal is, then fine.
But the analogy I like to use is to say, look, if, let's say you looked out your window and your neighbor was sitting on his lawn chair drinking a beer, and then you went out and you poured some gasoline on his house and set it on fire, he would jump up out of his chair and he would take an hour getting his hose out and whatever and trying to stop the damage and put the fire out.
So it would be crazy if we described that situation and said, okay, sure, you destroyed some property by setting that fire, but at least the upside is you generated some work for your neighbor.
Nobody would talk like that.
That would be crazy.
We'd say, no, that's a double whammy.
Not only did you destroy property, but now you made him get up and work more than he had to.
So as an economist, when you're looking at the economy as a whole, the fact that we have people doing more work to achieve to just tread water in terms of our physical possessions, that's not a good thing.
Really what you want to do is put people back to work creating new stuff.
So yes, for the individual who gets a job, that's a good thing.
But if that's just coming out of somebody else's property because they have to pay the person now to replace what was destroyed, then on that society it's not better off.
You're just transferring some wealth from one person to another.
So yes, it might be good for the people who are unemployed, but it's bad for the people now who had their property destroyed.
Well, I can only play devil's advocate so long about this.
I knew he had said some terrible things about the big tidal wave and all that, but about September 11th I did not know that he had taken that stand.
Of course, although I was familiar with his promoting, like literally promoting a housing bubble, an artificially high level of housing prices across the country to save society from a double-dip recession at the beginning of 2001.
It sounds like they took his advice and they went exactly along the Krugmanian lines, inflate, inflate, inflate, so that all this seems free.
Yes, you're right.
He had a bunch of quotes along those lines, but I think the one that was the real money quote that he was trying to wriggle out of later was like in 2002, I believe, where he said he was quoting a guy from PIMCO who had said, Alan Greenspan needs to replace the NASDAQ bubble with a housing bubble.
And so Krugman quoted that, and if you read the context, I mean, it's clear he's quoting it with approval, saying, yep, that's right.
And what's ironic is Krugman was doubly wrong.
He was saying at the time that we need a housing bubble in order to get out of this recession or to avoid a double-dip, but he didn't know if Greenspan was going to be able to pull it off.
So not only was he recommending the wrong thing, he wasn't sure Greenspan would be able to do it.
So it was like he was, as an economist, he was bad on two fronts.
But then what's funny there is later in 2006, Krugman wrote a column saying, Uh-oh, we're in a housing bubble, and of course he's blaming George Bush and everything, how bad George Bush is, which you and I agree with.
And one of Krugman's readers specifically asked him, back in the dark days of the tech bubble crashing, Greenspan fostered a housing bubble to replace it.
Do you think he did the right thing, given the options he had?
And Krugman said, yeah, that given the options he had, within limits, he did the right thing, but afterwards he should have raised the alarm once it was clear it was getting out of hand.
So, I mean, again, we're not inventing quotes and putting them in his mouth.
He literally said all throughout the crisis and then even afterward that, yeah, we need a housing bubble to replace this, because, again, his view is what happens with an economy is people, for some reason, don't spend enough.
So anything you can do to goad them into spending fixes the economy.
Alright, we'll have to hold it right there and go out to this break.
We'll be right back with some more.
Bob Murphy, right after this, I highly recommend the Politically Incorrect Guide to Capitalism and to the Great Depression and the New Deal.
Excellent stuff.
Makes a great gift.
Alright, y'all, welcome back to the show.
It's Anti-War Radio.
I'm Scott Horton.
I'm talking with Robert Murphy from the Mises Institute, author of the Politically Incorrect Guides to Capitalism and the Great Depression and the New Deal.
His blog is consultingbyrpm.com.
And now I wanted to ask you a little bit, Bob, about this YouTube that you placed up on your blog earlier.
I played it earlier on the show today, actually, to start out this show today.
I really liked your caption there.
I can't believe this is happening.
People on MSNBC are talking about Frederick Hayek, Ludwig von Mises, the gold standard, and Ron Paul as a prophet.
They bring up David Gordon.
I'm going to pass out.
I thought that was funny.
But so, the deal is, they got everything wrong in there.
And never mind the fact that Ron Paul says every day, ten times a day, I want to abolish the empire to save social security for the people who already bought into it.
They're going to just keep pretending like he wants to abolish it his first day in office, and I guess that's just not going to change.
But they also don't seem to understand his position on gold, which is, I think, to let Bob Murphy create a company that issues gold or silver certificates and currency backed by real metal to see whether they hold up in the market or not, and make the Fed compete, whereas right now, it's a crime for you to do that.
Do I have that about right?
Right, yeah.
Ron Paul does have a pretty nuanced position with respect to gold.
So he's actually come out and said he wants the government to sell off its holdings of gold, I think partly because he thinks that they don't actually have what they claim that they have, and so that would sort of force their hand if they were supposed to sell it off, that people would realize what they've been doing behind the scenes for so long.
But you're right.
I think you're right.
He doesn't want to go back to the classical gold standard just because he doesn't trust the government to honor that pledge.
So his solution is to just open it up to competition, just like we have free entry in every other industry.
Why don't you have it in money and banking?
And so, yeah, the way people would compete, no one's going to take pieces of paper that I issue if they're just fiat currency that I just, oh, here's a Murphy, go buy something.
What the heck is that?
But if I am a reputable company and I have stockpiles of gold or silver, and I say, no, this is a claim ticket, this thing that I do that's hard to counterfeit, here you go, and you just turn this into a merchant, the merchant knows.
If he turns into me, I'll give him an ounce of gold.
Well, then that could circulate as an alternate currency.
So Rob Hall wants to legalize all that, make sure you're not breaking any laws if you do that, and then also get rid of, you know, there's punitive taxes and things.
If you did that right now and then the gold price went up, you would get charged a capital gains tax on your holdings.
And so that's what, right now, the things that are hindering that sort of competition.
So he wants to get rid of all that stuff.
Well, and you know how it works, and it certainly is this way on this YouTube in question here.
It's Al Sharpton and a lady from The Economist, and I forget who else, sitting at a table, I guess the host of the show, talking about Ron Paul, which itself, as you say in your caption here, is just incredibly impressive.
Oh, it's the Time Magazine reporter talking about Hayek and Mises or his influences and this kind of thing.
But they don't ever have to make the case.
It's been 40 years now, Bob, and so they don't ever have to say, our money system is great and here's why, or anything like that.
All they have to say is, oh, come on, go back to the gold standard.
Well, that's just crazy.
And somehow we all know it, or something like that.
But I wonder, would you prefer a government-mandated gold reserve, as they would put it, go back to the gold standard, to Ron Paul's idea of the competing currencies?
What's so horrible, what's so backwards about a gold standard anyway?
Well, nothing's backwards about it.
Right, so it depends what the choices are.
So I've been, the last few years, writing a lot in praise of the classical gold standard, not because I necessarily think that that's what I would try to implement if I were somehow in office, or let's say Ron Paul became president and he asked me for advice.
I think, yeah, maybe we might not want to go back to that just because, as the critics say, you couldn't trust the government to respect it, and you'd want to just try to dismantle the whole system rather than try to reform it.
I think it is important, intellectually as an educational campaign, to make sure the public understands the connection that Nixon formally went off the gold standard in 1971, and oh, what a coincidence, that's when we had the worst inflation in a long time, it was in the 70s.
So that's not a coincidence.
And we had that huge stock market bubble and crash in 86.
That's not a coincidence that that was when the Fed had its hands completely untied and could do what it wanted with the money supply.
I mean, I think it's important to educate people as to why the classical liberals, people like Ludwig von Mises, were such staunch proponents of the gold standard.
It's precisely because it limited the government's power to inflate.
I mean, Mises compared it to a bill of rights.
So the point in having free speech and all that, it's not because you want to protect somebody's particular essay or speech, it's because you don't want the government to have the power to throw people in jail.
The same thing here.
Mises liked the gold standard because it tied the hands of the government.
They couldn't print as much money if they had to redeem it for a certain quantity of gold.
It just limited what the government could do.
And that was the great virtue of the gold standard.
So I think it's important that people realize that's historically the function that it served.
Yeah, but gold causes terrible booms and busts.
That's what they say history shows anyway.
And the Federal Reserve has brilliantly taken us off of, you know, removed this barbarous relic from the money supply, and that way they can use science to prevent the boom and bust business cycle, right?
Well, you're right.
That's what they claim.
But no, that's not what history shows at all.
I mean, for one thing, right now we're suffering through this awful world crisis, and that clearly isn't the fault of the gold standard, since we haven't been on gold in decades at all.
And the other thing is, you know, if you go back, because what they have in mind is they're going to say, oh, there was a stock market crash in 1929, and then all the central banks of the world had their hands tied because they're all still on gold, and that's why it festered for so long, and we had a decade-long depression.
But that doesn't make any sense, that story, because the nations of the world were on the gold standard all before then as well.
So it doesn't really explain why was it so bad right on that particular episode.
When you start delving into it, you see, well, what happened is during World War I, all the belligerents except the U.S. went off the gold standard.
And so that's partly why their economies were so screwed up, because they printed a bunch of money, then they tried to go back on the gold standard, and they set it at the wrong parity and so forth, and that's why Great Britain had massive unemployment, because they were trying to, like, they inflated but didn't want to admit it, so they tried to tie the British pound back to gold at the pre-war parity.
The world was not running smoothly on a gold standard going into 1929.
They had already all left the gold standard and then tried to go back on it at unrealistic exchange rates.
And so if anything, you would say what happened in the 1930s shows you what happens when nations go off gold to wage a world war against each other and then try to go back on it and cheat.
So if the nations of the world had all stayed on the classical gold standard, World War I would not have been as bad as it was, because they would have just run out of money, because the way they financed it was by printing up a bunch of paper money.
So, I mean, it's, like I said, the whole episode to me shows that, no, you should have, if they had all stuck on the original classical gold standard, you would have spared the horrors of World War I, and you wouldn't have had the Great Depression.
Well, I think it's Robert Higgs who says that the policy of the Federal Reserve in the late 20s, I think starting in 1927, was because Benjamin Strong considered Montague Norman, the head of the Bank of England, to be his mentor or whatever.
He did a big favor for him and inflated the American money supply in order to prop up the British pound in that circumstance, and that that's what really led to the stock market bubble, which crashed in 1929 and then brought on the rest of the madness.
You're right.
That's why I love doing your shows, guys, because I try to keep things simple, and then I realize that you've done a ton of reading in this area.
Yeah, so what specifically happened there, what Higgs was talking about, is the Bank of England ties in with what I was saying.
So during World War I, England went off the gold standard, or Britain went off the gold standard, and they were printing up a bunch of pounds to pay for the war effort.
And then after the war was over, they realized, oh, we want to be prestigious again.
Hey, I'll have London be the financial center of the world, so we have to tie the British pound back to gold.
But they had printed so many pounds in the meantime, they should have gone back with a devalued pound.
In other words, that it would take more pounds to get you one ounce of gold than before the war.
But they didn't want to do that for reasons of national prestige.
They didn't want to admit that they had been profligate during the war.
So they tried to say, no, no, no, we're going back at the pre-war parity, and that was unrealistic.
And so the trade unions, you know, they would have had to accept massive wage cuts.
They didn't want to do that.
Speculators were moving gold out of English vaults and into the United States because they could tell that the British pound was overvalued.
And so the Fed saw this problem festering in the mid-20s, and then, you know, the head of the British, the Bank of England and the Federal Reserve Chief, you know, they got together and then they said, okay, what are we going to do?
And so the New York Fed chairman said, okay, well, we'll devalue the dollar in order to take the pressure off the pound.
So the U.S. deliberately inflated to prevent gold from flowing out of English vaults into American ones.
And that's fueled, and that happened like in 26, 27, and that's when you see the massive stock bubble develop in the United States.
Okay, now I hope I can remember all the great questions I wanted to ask you.
So, okay, so where you have us is this is the intervention.
People think that the Federal Reserve was invented in 1933 as part of the rest of the New Deal or something, but this was the, what you're describing is how, you know, what the Federal Reserve was up to in the generation before the Depression and the screwing around with the money supply, working with the British and setting us up for the Great Depression.
But, you know, to really, I really want you to try to get at the heart of this.
I believe, you believe it's a myth that the central banking system and the scientific management of the money is, I don't know what you think its purpose is, but that its effect is the smoothing out of this boom and bust, this business cycle.
I mean, you've pretty much made your case.
You don't buy that free markets are what caused that particular boom and bust to be sure.
But, you know, they say that it was all the panics that led up to the Federal Reserve in the first place and that the panics would be much worse now if it was just left up to those evil corporations on Wall Street.
Look how bad they get us when they are regulated by the government, you know?
That kind of thing.
Right, yeah, so that is the dominant myth, and you're right.
The way, you know, the first pass of that just being completely, you know, to use naive empiricism, like to not even try to use economic theory and just say, well, does that story make any sense?
Like you point out, well, gee, the Fed was founded in late 1913 and opened its doors in 1914, and so can you blame the Great Depression on the wildcat free market?
Well, no, because the Fed was in operation for 16 years when the 29 stock market crash happened.
So the Great Depression, the worst calamity in world history, happened well after the Fed had been formed to allegedly spare us from wild swings in the business cycle.
And then, you know, they say, oh, well, we figured out what we did wrong that time.
Now we got it, and we had, you know, the prosperity of the 50s and 60s.
Okay, and then in 1986 there was the worst stock market crash in world history, far worse than in 1929.
Oh, okay, well, now we figured that out.
And then now we have the huge housing bubble and collapse and all, you know, people are saying the euro is going to collapse.
Well, don't forget malaise in the 1970s, too.
Oh, yeah, I forgot about that.
Yeah, all those stagflation in the 70s, forgot all about that.
Yeah, so, I mean, what would the world look like if central banking screwed things up?
You would have the worst crises in world history happening after the central banks were on the job, and that is what we see.
So, you know, the critics, I don't think they realize they're doing it, but their theory is coloring the way they see the world so much that they're just assuming that, oh, well, even though things were awful with central banks running the show, we're just imagining that they would have been even worse had we had free markets at the time.
But they actually can't look at history and show things in practice were worse under free markets because they weren't.
Things were clearly worse under the management of central banks.
That's when we had the worst crises in world financial history happened under the, you know, when central bankers were on the job.
Right, but now it's not just a correlation or something.
You're part of this Austrian school of economics, and if I have it right, your school of economics understands business cycles in an entirely different way than the rest of the textbooks, the rest of the professors, the rest of the talking heads on TV.
Right, yeah, so, I mean, you're right, before I wasn't trying to just suggest that all we can do is look at history, but my point was just these, you know, mainstream guys think that they're the real empiricist rational ones and that we Austrians are the ideologues who don't look at data, and so I'm just pointing out even a superficial observation would suggest that we're right and they're wrong, that they have to, you know, they're the ones who have to engage in hypotheticals and say, yeah, sure, things blew up several times on our watch, but trust us, we got it right this time, and believe us, it would have been worse had we not been there.
Yeah, and they even adapted the chapter out of the fifth grade textbook that says that in the 20s it was freedom and that caused the problem, so now we need a new deal, and they just put that right on this experience and said, we're all supposed to believe that George W. Bush was Ron Paul, and that we had just had eight years of Ron Paul-ian free market economics, and that's what led us into this mess, and now we need a new deal, it was amazing, really, although it was simple enough to explain, I learned the very same rap in elementary and junior high, you know?
Right, yeah, so to go back to the other question, yeah, the Austrian, when you say, okay, theoretically, you know, how do you guys, what's your explanation for the boom-bust cycle?
They say, it's simple, that interest rates, if they're set by the market forces of supplying demand so that people genuinely save more, that pushes down interest rates so businesses can borrow more, that leads to sustainable economic growth.
When people defer consumption, then society can, you know, recalibrate what it does instead of cranking out TVs and steak dinners, it cranks out construction trucks and drill presses and things like that, and so that's how we grow richer over time, is through saving and investment.
But what happens if the interest rate goes down, not because households are actually saving more, but what if the interest rate goes down because the Fed just creates a trillion dollars out of thin air and injects it into the banking system?
Well then, yeah, the interest rate still goes down and it still stimulates this productive boom where businesses are investing more and hiring more workers, but now households are consuming more, too, because, oh, interest rates are lower and so I'll, you know, I'll consume more, and that's what the Austrians say happened during the housing bubble years.
The green span brought interest rates way down to levels that hadn't been seen in decades, and that fueled the housing bubble, and so it gave this temporary appearance of prosperity where everyone felt rich, and so they started living it up, but we were just consuming the capital, that we were eating the seed corn, if you will.
And so we got, you know, you can do that for a few years, but eventually you hit a brick wall because we weren't actually richer, we were just not saving and investing enough, we were just turning everything into consumption.
So that was the Austrian, you know, understood, so that's what happened in the boom, and then you have to have the recession for the economy to right itself, for workers and resources to get put back to where they should have been all along because they got sucked into unsustainable projects.
And so that's, so why is central banking bad?
Because it makes that process possible, that central bankers can push down interest rates below where they ought to be, and that sends the wrong signal to everybody and screws up the economy.
Right, okay, and so if we take the housing bubble, the last one, like since the dot-com bubble and then we had the housing bubble then, basically that means that whenever there's a crash in the dot-com or the housing bubble, then they just make a new one.
They never let it really correct, although it seems like there's a lot of deflation going on in terms of people being bankrupt and out of work and, you know, less prosperity going around right now, but it seems like it's taken a long time to get out of this, you know, dip.
Yeah, you're exactly right, that's what they do.
They just keep, every time the effects of the last bubble are finally, you know, coming to fruition and then the economy starts trying to correct itself, that is painful, and if the government and the Fed sat back and just let that happen, yeah, there'd be an awful 12 to 18 months, but then you would have solid recovery after that and you wouldn't need another bubble, but the Fed and the policy makers, they don't want to have that happen.
It's too painful, they can't deal with it, so they set another boom in motion and so, yeah, we had the tech bubble, that crashed, and what did they do?
Greenspan didn't want to let that happen, so he just fueled the housing bubble and that just masked the problem and that blew up in our face, and right now I think we have a bubble in sovereign debt.
I can't believe how low the yields are in treasuries and things, so I think that's going to blow up at some point.
You're going to see interest rates go through the roof, and then at that point I think the Fed's going to be out of options because they already would have pushed interest rates down to zero and dumped trillions of dollars in the system, so once this particular bubble that we're in blows up, I think they're going to be out of options.
Well, so what are they going to do?
What's going to happen?
The government will just cease to exist and we'll all just rub buckets of flowers or what?
Well, it depends on, I guess, specifically what you think, but if the dollar crashes, then I think people are going to try to get out of the dollar and go into gold and silver or go into alternate currencies that are stronger, so yeah, it'll be a pretty crazy period, but at that point the Fed won't have any power to do anything if people just literally abandon the dollar.
Now, are they going to let it get to that point?
I don't know.
I mean, they still could turn it around if they wanted to, but that would destroy the big bankers, and so I can't see Bernanke doing that, because the one thread through all of this that makes sense to explain Bernanke's actions is what he's doing helps the big banks.
No matter what school of thought you subscribe to, what he's doing is not good for the economy.
If you're a Keynesian, you think you should be doing more, and if you're an Austrian, obviously you already think you're doing too much, but nobody is really happy with what he's doing right now except the big bankers on Wall Street.
They're getting recapitalized.
They're having record profits, so that's the one element to this to make sense of what the heck is Bernanke up to.
To me, it's, oh, my explanation is he's helping the big bankers.
Well, and I can see what you mean then about Mises and the gold standard being like one of the amendments to the Constitution or something, a limit on their power, because the effect that this has on people, I mean, hell, as bad as this has been, as much pain as this has caused, they might as well let it have been worse.
I mean, how much worse could it be with a real unemployment rate of 20%?
And the whole world economy wrecked.
Yeah, you're right, because that was the thing they did.
If you remember back in September of 2008 when Lehman collapsed and then the Fed took over AIG and Treasury Secretary Paulson was running around saying, oh, we need TARP, we need whatever it was, $700 billion to bail out.
And the reason they always gave, of course, oh, not that we care about these rich bankers as far as we're concerned.
We'd throw them to the wolves, but we can't let Main Street collapse.
We're doing this to help the little guy.
And so if they had told people at that time, okay, yeah, we need $700 billion to bail out these bankers who made all these bad loans and the unemployment, the official numbers we released, was going to be higher than 9%, still going into 2012, how do you guys feel about that?
There would be riots.
They wouldn't have said, oh, yeah, go ahead and do that.
They would have said, what are you kidding me?
We'll just take whatever is actually coming our way right now rather than bail out bankers and still have an awful economy three years from now.
And then they go so much further into debt bailing out the bankers that then the question becomes whether the debt is a big enough percentage of GDP, whether they have to just completely debase the currency to pay it off, right?
Right, yeah.
I mean, if you look at what was the – I think I have this right.
I think in the last three years we've added – in other words, if you look at the total government debt right now, I think one-third of it has been added in the last three years.
I think that's the statistic I dug up the other day.
So, I mean, it's just amazing when people are talking about how much debt we're taking on.
Under Bush and then Obama, it's incredible how much it's gone up.
It is a fraction of the economy.
So you're right.
At some point, I mean, that just becomes – you get so deeply into debt that you just can't pay it off, and they might not literally default.
They may just print it.
So it wouldn't be that they actually would stop sending interest payments to people.
It's just they would do it with inflated dollars, and so people are getting paid back with dollars that don't buy anything.
And then is it – I really need to read the books instead of just interviewing you all the time, but is it at that point that you're worried that this securities bubble will break, all the investments in the American government's debt?
That's when people will flee that.
Right, because what's happening right now is, ironically, as bad as the U.S. fiscal situation is, interest rates are really low because Europe is even worse.
In other words, they're – if it's going to – if the chickens are going to come home to roost there's going to be a sovereign debt crisis that's clearly hitting Europe right now sooner than the United States.
So investors are flocking into U.S. treasuries, not because they think it's a bang-up investment, but just because they don't know where else to go.
I mean, they're doing that and going into gold, basically, gold and silver.
So – Which just has given Bernanke more confidence to keep doing what he's doing, right?
Right, that's the thing, is when I – you know, other inflation hawks and I, when we try to argue with economic economists, they say, understandably, they say, you guys are crazy.
Look at the bond markets.
The bond markets aren't forecasting inflation.
And what they mean is, you know, if you buy – people or investors are willing to accept very low yields on long-term treasuries.
And so, you know, the idea is, well, if investors were afraid of inflation like you are, why would they be lending money to their Uncle Sam at, you know, 2% for 10 years?
That doesn't make any sense.
But, as you're pointing out, I mean, it does make sense that people are just terrified and they don't know what to do with their money, so they're putting some of it in gold and some of it in bonds.
The fact that that's keeping yields low in bonds doesn't really mean, oh, that's a vote of confidence I have in Bernanke.
It just means everybody else is so awful, too, that we don't know where to go.
Yeah.
And at this point, the only thing backing up the currency is the government's promise to send out IRS agents and collect the money from us to pay them.
But we don't have any more money.
They took it already.
Right, right, that's – yeah.
So when people say these bonds are backed up by the full faith and credit of the United States Treasury, that just means, yeah, we can take money from your neighbors down the road to pay off what we owe you, so trust us, we'll pay you.
Yeah.
Now, I wish I understood this better so I could ask my questions better, Bob, but I was talking with the other Bob, Bob Higgs, about this, and he was saying that he thought that the interest rates would start going up before any kind of very high rate of inflation would kick in, and that the Congress would be forced to cut either the empire or all of the benefits or both or something at some point here before it comes to a complete crack up in the American dollar.
But I'm not exactly sure about how all the causes and effects go on that stuff.
Yeah, I mean, I think he's – I think I know probably what he has in mind is right now the problem is, you know, Bernanke has created something like $1.6 trillion of excess money that was injected in the financial sector.
So that's what people are talking about, the excess reserves, but it's mostly just sitting parked at the Fed.
And so that's partly why, even though Bernanke has done all these incredible things, you know, gasoline is not $20 a gallon.
People are scratching their heads saying, what's going on?
If he's printed all this money, how come we don't see it?
And part of the answer is that it's just sitting parked at the Fed.
It's like he gave it to the bankers and they just said, well, we don't know what to do with it, so we're going to leave it with you in our accounts.
But if they start lending it out, then there's the multiplying process, and they can, you know, create loans basically at a ratio of 10 to 1.
And so in normal times, if the Fed had done what Bernanke has done the last few years, then, yeah, the dollar would have dropped by, you know, 90% or something like that.
But thus far, that process hasn't happened for various reasons.
So I think what Higgs probably means is that you would start to see the banks lend that out once interest rates started going up, and then it became profitable for them to make new loans to people.
You know, if they could lend it to a business at 10%, they would do that rather than leave it parked at the Fed at 0.25%, which is what the Fed is paying them.
But right now, interest rates across the board are really low, so the bankers are saying, well, why would we lend it to a business at 1% and let's keep it at the Fed at 0.25%.
Well, if I understand it, then they're even in a worse rock-hard-place position than I thought, because if the interest rates go up, then that will lead to the flooding of even more currency into the circulation than when they have it all the way down, you're saying.
It's a really weird, you know, you get cause and effect mixed up.
Yeah, it's a crazy situation.
I'm picturing it's like a really big marble at the top of a really narrow mountain.
Yeah, or like a giant lake behind a real flimsy dam.
Right.
And so if anything starts moving one way, like right now we seem to be at this equilibrium where, oh, okay, nothing's blown up yet, that's okay, but the Keynesians think it's because, oh, we don't have enough demand and we're stuck at the bottom of this, you know, valley, and I think it's the other way around.
I think that we're, you know, perched on this incredibly precarious mountaintop and that if things just start moving one way or the other, it's going to unravel pretty quickly.
So you're right, if interest rates start going up and banks are tempted to start lending it out, then the Fed, they're going to have to jack up, you know, the interest rate they pay the banks to keep the money parked at the Fed, but then that makes that excess money to grow exponentially, because that's the way the Fed pays them is, you know, they make their balances grow.
Right, but then again, on the other hand, if money's that expensive for people to borrow, then that amounts to, you know, neutralizing a lot of that multiplier effect because they won't have anybody to loan it out, right, to loan it to, because people won't be able to pay those high-level interest rates.
There is that, yeah, again, it depends what assumptions you're making, but, yeah, part of what's going on is right now people...
Well, again, this is a crazy situation.
The reason people right now are okay just sitting on cash and tolerating these really low interest rates is that a lot of consumer goods prices aren't rising very quickly, and so it's not a bad deal given how bleak the economy is to just sit on cash or near-cash equivalents, but if we start getting prices rising, if gasoline starts going up 10% a year and milk and eggs and so forth are going up 10% a year, well, then people aren't going to want to be sitting on cash.
They're going to want to get their wealth into something that keeps pace with inflation, and so I'm just saying that if this thing did start getting out of hand, it would be a snowballing process, and they would have to really take drastic actions.
I mean, it would make...
You know, what Volcker had to do to get inflation under control back then, they would have to do 10 times worse than that now because they've dug themselves into a 10 times deeper hole right now.
Right, which they can't do that because the debt is so much more now that just the interest on the debt would be more than the entire federal budget itself right there.
Right, yeah.
If interest rates were to spike, yeah, that's a good point.
I hadn't thought of that.
If the way to contain inflation, price inflation, would be for them to jack up interest rates to 20% or something, then that would just destroy the federal budget that they would have to...
Yeah, their interest payments alone would consume all the tax revenue.
I mean, it's better than the way the Japanese Empire fell, but it seems like it's pretty brutal.
You know, Ron Paul, they introduce him now.
They can see when they introduce him on TV.
They go, he's the guy that predicted all of our economic problems beforehand.
And then he says to them, I'm predicting much worse economic problems ahead if we keep doing what we're doing.
And they go, nice.
Anyway, we ought to pay attention to that.
The same guy that they just said was the one who got it right last time.
Because of course, you know, he's listening to you guys and reading all the same source material as you, looking at the same numbers as you, and from the same point of view.
Boy, I don't know how scared I'm supposed to be, but it seems like I am some.
I don't know.
Yeah, it is.
Because it all implies major disruption in the way things work around here coming soon.
That's why.
Right, exactly.
And the thing is, to be honest with you, I mean, sometimes, you know, when you start seeing things like the excess reserves, there's some evidence the last few months that they are beginning to be lent out.
And you see various measures of the money supply are rising at alarming rates.
And it does look like, oh my gosh, this thing that we've been warning could happen looks like it might be starting.
But there almost is this sense of disbelief.
And recently, Ron Paul on TV was saying, we're going to have riots here like they're having in Europe once the budget crisis really hits here and they stop the checks flowing to all these people who have come to expect getting checks from the government.
Those people are going to be mad.
They're not going to take it lying down.
They're going to go out and start flipping cards and stuff.
And even though intellectually I agree with that, you know, it's just hard to imagine that happening.
But yet, you know, it probably will happen.
Well, it's just like the bond market thing.
It's like, you know, Justin Romano's article today on antiwar.com, he quotes James Burnham's, no, George Orwell's review of James Burnham where he went from writing a book about how Germany's going to win to writing a book about how the Soviet Union will rule the future and whatever.
And Orwell's saying, yeah, whoever's powerful at the time, you just, in your worship of them, you imagine their permanence.
But that really just isn't necessarily the way things go.
I think we've already known for a few years now the unipolar moment is over.
American hegemony, it's all downhill from here.
Yeah, I mean, just the fact that people on MSNBC are talking about the gold standard, like you said, you know, they were dismissive of it, but the fact that they have to even bring it up, I mean, five years ago, if someone had said, hey, do you think S&P is going to downgrade treasury debt from AAA, people would say, what are you, crazy?
That will never happen.
I mean, literally financial textbooks, like mathematical finance books, if you want to go get a degree at a major school, they would treat U.S. treasuries as a riskless asset.
Like, by definition, U.S. treasuries were supposed to be riskless, and yet now they just got downgraded.
And so, I mean, it's, stuff is beginning to happen.
These, you know, these paranoid Tea Party-type scenarios are beginning to come true, but, you know, it's hard to even picture that, because it's just, you've been brought up to think that the United States is invulnerable, that the United States government, they can do anything they want, and they're all powerful, and the Fed can do whatever it wants, and now it's starting to actually get away from them.
Yeah, well, you know, Charles Goyette was on the show, and he said, look, the University of Texas just bought X number of dollars worth of gold for their savings, and look at India and South Korea and all these other countries are diversifying out of their dollars and into precious metals, that it's already happening, the crack-up boom.
It may be, you know, overseas first and in slow motion in a way, but people, in fact, I guess maybe that's because they want to avoid the panic, right?
They want to try to get out of the dollar before everybody else sees them doing it and copies them, you know?
There's nothing like it's already on.
Yeah, to go back to your, you know, before you were asking me about Bob Higgs and whatever, the way I see this playing out, like what the actual crisis would be, the thing that sets it off, is I'm imagining the dollar would crash against foreign currencies, that like some Chinese minister says at a press conference, oh, we're going to slow the rate at which we buy treasuries, and that gets mistranslated to we're going to start selling treasuries.
And I'm like, oh!
And then they rush for the exit.
I mean, the dollar could fall 30% overnight, and if that happens, then, you know, import prices would go up and all of a sudden Walmart wouldn't be so cheap because they get a lot of their stuff from overseas.
So, I mean, that's the way I could see things happening very quickly, and then you'd see interest rates, you know, they'd have to raise interest rates to get the dollar from, you know, and then that's where it would just get out of hand pretty quickly.
Right, and see, yeah, the joke there, right, is that nobody would go with the mistranslation if they didn't think that the Chinese weren't fools for holding on to all these treasuries, right?
They would say, wait, you didn't just mean to say that, right?
But if they can't figure out for the life of them why they're not diversifying out of the dollar, it would be pretty easy to go with that mistranslation and cause something like that.
I could see it myself.
Right, and it's because that's the thing, too, and if we hadn't just gone through the housing bubble, I mean, you and I are, you know, fairly young compared to some of these other guys, and that's why, you know, I wouldn't have thought everybody could be this stupid.
You know, like, that's why, you know, how can I say all these bond traders are, you know, they're in a bubble, and the only reason I can say that with such confidence is I just saw with my own eyes what happened in the housing market.
I mean, in 2006, you had guys like Peter Schiff and others saying, these home prices are crazy, and any kind of metric you want to look at, housing is clearly overvalued, it's going to come crashing down, and you had other gurus just literally laughing at them, saying, you don't know what you're talking about.
So, I mean, the fact that the market can collectively be fooled when it comes to housing, you know, why couldn't that happen with the dollar?
Right, well, and that's like the whole thesis, right, is that the artificially low interest rate makes it seem like, well, I guess there's a bunch of savings to be consumed on starting up my big new project, when it's not time for that.
Right, and in a bubble, you know, by definition, it's self-fulfilling once it gets off the ground that if prices keep going up, then people can, you know, gain short-term, so even people who know that this whole thing is going to blow up eventually, they figure, well, if I can get in and get out, I might as well, and they just, you know, they just don't want to not be the fool holding the bag when it collapses.
So once the thing starts off, it can go on, and then that's how they diffuse the cynics.
You know, both of us were just looking at the long-term projections of government debt and saying, why are people lending to the Treasury at 2%?
It doesn't make any sense.
The people just point at the bond market and say, well, they apparently think differently, so who the heck are you?
But that's not really an argument.
You know, our point is, no, the bond market is wrong, so you don't fix that, you know, you don't correct us by saying, no, the bond market says that they're right, and, well, of course they think they're right, but they could be totally wrong.
Right, yeah, I was, I think I lost an argument because, you know, I didn't have my Bob Murphy together or whatever, but I said, yeah, look at all this inflation in housing, and a friend of mine said, yeah, but, you know, that's only in some places and whatever.
There are some bubbles where, but you could never have an entire nationwide bubble in housing because the markets in the different places are just too different from each other, and that just can't happen.
So that's why we know that it's not a big deal and it's not going to cause any kind of significant crash or anything.
And what's ironic is that very argument was what was behind the computer models like the S&P and Fitch and Moody's used to give AAA ratings to those mortgage-backed securities.
It's because they were, you know, the way they modeled it, what's the risk to an investor who buys, you know, this tranche that has all this protection and so forth with the pool of mortgages drawn from the whole country?
And they're saying, well, sure, the Miami real estate market might crash, you know, Las Vegas might crash, but what are the chances of all those markets crashing at the same time?
And so they thought they were independent statistical events, like, you know, you're multiplying by each other, so they're saying, well, the chance of there being a whole nationwide downturn in, like, one in a million years, that's not going to happen.
But, of course, that did happen because they were, you know, they were tied to each other.
The Austrians say it was monetary policy.
Do you ever suspect that some of the CEOs on Wall Street are secret Austrians and that they know the boom and bust cycle and what really causes it and how it really works, just as well as you guys, only they're playing it and playing dumb like they're Chicago school types or something?
Well, I do think so.
And the one actual anecdote that I have, you know, like a piece of evidence besides just my own hunch is that I know a guy who works at a hedge fund in Wall Street, and he's an Austrian.
You know, he's my buddy, and he reads all this stuff, and he told me that his boss, who publicly, like, if he's on CNBC or something, is real bullish about the U.S., that that guy was asking around, saying, I want to buy a bunch of gold.
How do I do it under the radar?
So, you know, that's...
So you wouldn't know that that guy was afraid of things from his public persona and from his, you know, publicly announced trading positions, but privately he was trying to get a bunch of gold because he was afraid things were going to blow up.
Yeah.
Well, I guess the proof is in the pudding that the guys at Lehman Brothers and Bear Stearns weren't Austrian.
Right.
They got caught out.
All right, well, listen, I'll let you go.
I've kept you on way over time here.
I really appreciate you staying on with me, Bob.
It's great to talk to you.
Sure thing.
Thanks, Scott.
Everybody, once again, that is the great Bob Murphy at the Mises Institute, M-I-S-E-S.org, for so much free stuff.
Yeah, how many typed words there are on that website.
More than the whole rest of the Internet combined.
Mises.org.
And check out his blog, Consulting, by RPM.com.
And his two books, The Politically Incorrect Guide to Capitalism and to The Great Depression and The New Deal.
