03/22/12 – Robert P. Murphy – The Scott Horton Show

All right, y'all, welcome back to the show, it's Anti-War Radio.
I'm Scott Horton and our first guest on the show today is Bob Murphy, Robert P. Murphy to you.
He keeps the blog Consulting by RPM.com.
He's a fellow at the Ludwig von Mises Institute.
He's the author of the Politically Incorrect Guide to the Great Depression and the New Deal, very important lessons for your brain in there, and also the Politically Incorrect Guide to Capitalism, which I could not recommend more highly to those of you who's got a friend with that anti-capitalist mentality, who thinks that what we really need is just the right mix of socialism and everything will be just right, and you give them this book and it'll fix their wrong head.
Welcome back to the show, Bob, how are you?
Thanks for having me, Scott, I'm doing well.
Good, very happy to have you here.
I saw this hilarious article and I thought of you.
It's called, Bernanke Schools, Ron Paul's Potential Fans on the Gold Standard.
Now, I didn't click all the links here, maybe there's video, but I can imagine it.
Now, you kids, I know you like Ron Paul, but really the gold standard is stupid and let me count the ways.
And so, let's see.
Among the arguments Bernanke made Tuesday, this is at yahoo.com, this news story.
Among the arguments Bernanke made Tuesday, the gold standard requires us to waste resources by mining gold in Africa and shipping it here.
It connects nations' currencies, which exposes us to monetary policy in other countries, and it leads to deflation.
So, I guess let's just start with the waste.
It is easier to print a dollar than to dig up a bar of gold, so he sounds like he's got a real good point there, right?
Well, yeah, I mean, that's the standard argument against the gold standard.
And even going back to Adam Smith, economists were aware of that, but as you say, it's a trade-off involved.
So, sure, if we could restrain the government from printing money through some other mechanism, then we should consider that.
But you're right, if the issue is, okay, if they're stuck on the gold standard, then we're going to have some resources that are going to be used digging it up and then storing it to back up the dollar or whatever the currency is.
Or we'll just take all the constraints off and let them print as much money as they want.
That's sort of a foolish bargain to be making, that the waste caused by the housing bubble and what we're doing right now and so forth, I mean, that just dwarfs the waste of, oh man, we had to use some workers and some tractors and other things to get some gold and move it across the ocean to some vault somewhere.
I mean, that's nothing.
Yeah, it couldn't possibly be much.
I mean, how big of a ship do you need to move gold, right?
Not an oil tanker.
Right, right.
So then, now this one, I kind of always meant to ask you this, or maybe Ron Paul or somebody like you on the show, it seems to be a good point.
It connects nations' currencies.
The gold standard would connect nations' currencies, which exposes us to monetary policy in other countries.
Like, say, for example, the BRICS wanted to conspire against us.
They could dump all of their gold onto the market and that would drive down the value of our dollar.
They would have control over our monetary policy instead of our own loyal patriotic open market committee.
Yeah, well, you know, I'm not even sure exactly what Bernanke was getting at there, because really what's happening, if a bunch of nations are on the gold standard, then really they're just tying their own currencies to gold itself.
So yeah, I guess it is true that indirectly if one nation tries to do something, it affects the other ones.
But that was kind of the point of the classical gold standard, was that it kept everybody honest.
That if one nation started inflating while everybody else maintained the status quo, then pretty soon its gold reserves would flow away from that country and into the vault of the other countries.
And so if it wanted to stay on the gold standard, it would have to abandon its inflationary policy.
So it's a bit like saying, oh, we don't want to have rules in basketball, because then if we commit a foul, the referee's going to call it, and it's going to constrain us.
So I mean, yeah, there is that aspect to it.
But anyway, that's...
Well, but now what about as like a subtle act of war, or not so subtle act of war, where, you know, I don't know, the EU and the Russians and the Chinese and, I don't know, invent a new continent with some enemies on it, because we're friends with all of those people.
But anyway, the mystery Atlantis continent comes back, and they're our enemy, and they dump a bunch of gold as a way, like a passive-aggressive move against the United States.
You're saying that that'll hurt them enough that it'll keep them from doing it, or what?
Well, I mean, for one thing, that would be incredibly expensive, right?
I mean, because they'd have to first acquire the gold and then dump it.
And so that would be a pretty expensive move.
And right, it's not...
I mean, they can do things like that right now.
I mean, so there are countries that have been complaining about the Federal Reserve's monetary policies the past few years saying, you know, gee, when you guys print up so many new dollars, if we didn't do anything, then the dollar would... then our currencies would strengthen against the dollar in the foreign exchange markets, and that would hurt our exports.
And so in a sense, you've got a lot of these Latin American countries that are implicitly forced to devalue their own currencies so that their exports don't get hurt in the short run.
Right.
So...
Well, it's not just them, right?
So the whole world has to inflate in time with the United States, basically.
Well, right.
But I mean, it particularly strikes countries that have just a few major exports, you know, that they're really dependent on that, and that they're commodities, which, you know, the price is just very quickly based on currency movements.
So...
But you're right, it's everybody, but those particular countries that are kind of small and they're relying on just selling one or two things in the world market to then buy everything else, they're particularly vulnerable.
So I get, you know, my point is, you don't avoid that problem by having floating fiat currencies.
You still have this issue that if a bunch of countries really were out to get you and were willing to hurt themselves to try to inflict some collateral damage on your country, they could do it right now by running their printing presses, and that would cause disturbances.
So again, the point is, if you want to constrain the ability of everybody to do things with monetary policy, including using it as a weapon, well, then you're better off if everybody is saying we have to redeem our currency in a certain number of units of gold.
You see what I mean?
Like, that's constraining what they can do.
Right.
Well...
Of course, right.
But that's the whole thing is you and I are both coming from that libertarian premise where we want to constrain all these different states powers.
That's why we want to tie the dollar to gold that way, or at least, you know, new privately made currencies.
We want them tied to gold because we call it, you know, honest money.
And we also want our government that limited.
But I guess what Bernanke is saying is, you know, he comes from a different premise where the government is to be as big as Congress says, and that's great or whatever.
And that, I guess maybe that's sort of his point, why he's against gold.
We need paper money in order for the government to be big enough and do what it wants.
A gold standard wouldn't work for the world empire or for even the national empire that we have.
Well, yeah, I mean, part of part of his worldview is that he thinks there are situations where the economy could benefit from a huge expansion of the money supply.
So, you know, he thinks that's true in the early 1930s that the US was desperately in need of a huge expansion of money.
And he thinks that that was, you know, the case in 2008.
And it was a good thing that Bernanke's hands weren't tied by the gold standard, right?
So he was able to double the quantity of base money in a few short months, right?
So that's his worldview.
Whereas I and other Austrian economists typically don't think that the Great Depression was caused because there wasn't enough inflation by the Fed, for example.
So yeah, if in your mind, the central bank has a big responsibility and has to use massive bursts of inflation once in a while to avoid disaster, then you're going to be very depressed if all of a sudden there's all these shackles put on the discretion of central bankers.
But if you're like me, and you think, no, it's the central bank that causes these massive boom-bust cycles, then you do want to have shackles put on or get rid of the central bank altogether.
All right.
Well, geez, I guess I'm going to talk about you and who you are and what you do a little bit because we're almost at the break.
And then when we come back, we'll talk about deflation and inflation and other interesting stuff with Robert P. Murphy from the Ludwig von Mises Institute.
That's mises.org.
His website is consultingbyrpm.com.
Robert P. Murphy there, consulting by RPM, free advice is the name of the blog.
And he's also got a YouTube channel, Bob Murphy and cap at youtube.com.
We'll be right back.
All right, y'all.
Welcome back to the thing here.
It's anti-war radio talking with Robert P. Murphy from the Ludwig von Mises Institute.
Bam Bernanke, this guy in charge of the Federal Reserve, its chairman, he thinks he's smart.
So far he made, well, according to, and I didn't see the whole speech, but according to this news story, he took a shot at Ron Paul basically because there were some young people in the audience.
And so he was kind of being patronizing and saying, oh, I know you like Ron Paul, but here's why he's not right at all.
And according to this article, his arguments were, oh, it costs so much to dig gold out of the ground.
Bob Murphy dispenses that quickly with, you know, a lot of money, a lot of money, a lot of money, a lot of Bob Murphy dispenses that quickly with, yeah, well, having a massive boom and bust and losing trillions and trillions of dollars in this horrible so-called business cycle economy of yours costs more.
And then other nations, why they could manipulate the gold market and affect our currency.
Yeah.
Well, other nations can manipulate their currency and affect our currency right now anyway.
And so there's so much for that.
And now what we're left with is that it will lead to deflation.
Now, I don't know his exact words.
It's not in quotes here.
Maybe he said falling prices.
Maybe those things are the same thing.
Maybe they're not.
What do you say, Bob?
Well, I mean, Bernanke, when he says the word deflation, he means falling prices.
So, yeah, that's one of the arguments.
And they think that there are various reasons that falling prices are a bad thing because, oh, you know, wages are sticky.
So if product prices fall, then businesses can't afford to keep hiring workers.
So they have to lay people off because, you know, they can't just cut wages to the same extent.
So there's various arguments.
And that's why Bernanke said it was so critical in the last few years that he be able to inject all that money in because they had to stave off this deflationary threat in his mind.
So in general, I think that's a terrible argument.
I don't believe that the early 1930s were so bad because of falling prices.
And I've done some work in Tom Woods and others that, for example, in 1920 and 21, there was also a depression.
They used a small d back then.
And in the first 12 months of that depression, prices fell far more than they fell in the same time period in the beginning of the 1930s.
All right.
So falling prices, per se, don't spell disaster.
What happened last time, the reason that it wasn't such a big deal last time is that, you know, in the 20s was that wages fell too, right?
So the issue is there was some reason that wages were all of a sudden sticky in the 30s.
And there's various things like the strength of labor unions and the Hoover administration and others were doing things behind the scenes to tell businesses don't cut wage rates and various things.
So I think a free market by itself can have flexible prices.
And if you have falling prices, that's not the end of the world.
And we see throughout history that that's, you know, it can't be that the Great Depression was caused by falling prices.
So I think that's just another bogus argument that Bernanke was using.
Well, I don't understand.
Bob, are the masters of the universe really that stupid?
The falling prices, like you say, you look at last time, there was a big fake bubble that Greenspan and Bernanke built up.
The falling prices was the result of the scam no longer working, the curtain being pulled aside and prices trying to see level.
Right.
Yeah, that's a great point, too, that if what you're concerned about is you don't ever want to be in a situation where to restore equilibrium, prices across the board need to fall 10 percent.
Well, then don't pump in a bunch of money beforehand and then you'll never find yourself in that situation.
Exactly.
They're always talking about the symptoms of the disease they got and and how I guess more what made them sick is the only treatment they can think of.
Yeah.
And it's you know, when you say, can these guys be that dumb?
I mean, obviously, you and I, I think, are on the same page when above a certain level.
I mean, I think they have Bernanke out there because they tell him this is what the policies are going to be.
And you come up with whatever academic spin you want to give it.
Yeah, exactly.
We're stealing this money.
You tell them why.
Right.
So, I mean, now I do think there are plenty of people who genuinely believe in the sorts of, you know, the theoretical framework and blah, blah, blah.
But but yeah, I mean, above a certain level, the people who are actually in positions of power, I don't think it's just that they're making an honest intellectual mistake and we have to just keep trying and eventually they'll see the light.
I think that these policies are driven by the interests of the bankers.
And Bernanke's job is to, like I say, to justify using some sort of theoretical framework.
All right.
So now, I guess maybe I went off the story there with my contempt for the man when I should have stuck more to the point.
You're telling me that falling prices, if it's not the bust part of the boom bust cycle, but we just have a gold currency, obviously, that inflates very slowly as people are mining, you know, more gold and that kind of thing, that falling prices in those circumstances, all things being equal, are OK.
It's only the problem is when it's a crash and then they point to falling prices during a crash and they say, see, we don't ever want falling prices.
Look how horrible that is.
Right.
I think that's right.
So, yes, there are periods in history where if you go and look and, gee, prices are falling a lot and the economy is awful, and so they think that the one causes the other when, no, it's more the other way around.
Periods when the economy is crashing are also when, if you don't have fiat money getting pumped in at the same time, prices are going to come down, too.
So what's ironic is even in like 1926 and 1927 in the United States, prices, the consumer price index was gently falling.
So you had falling prices then, and that was in the middle of, you know, the roaring 20s when everybody thinks the economy, you know, either was healthy or was overheating.
So what happens is in a normal economy, if production keeps increasing and the quantity of money either is constant or grows more slowly than the quantity of output, well, then in general, the price per unit is going to go down.
But that's perfectly fine.
Businesses can still maintain their margins because they're able to sell more stuff, right?
If the workers get more productive, and so now if they're given a workforce, they can crank out 10% more widgets than the businesses can afford to have the widget price fall by 5%, and that's fine because they're cranking out that many more, and so they still maintain their margins.
And workers then, even if they have the same paycheck, it can now go farther at the store.
So everybody's standard of living goes up.
That sort of gentle price deflation is fine, and you saw that throughout various stretches of U.S. history when the dollar was tied to gold or silver.
In other words, the prices of goods are tied to the supply and demand of the goods, not mostly the money that's being used to trade in the goods, the way it is now.
Well, yeah, I mean, well, it's the interaction, right?
So if, I mean, this is a little bit of a crude way to think about it, but I mean, if the total amount of...
Well, I'm a vulgar Austrian here.
I never took all the classes.
I really wish I did.
Yeah, I mean, if it's the total amount of...
I mean, what I'm saying, it's the interaction between the two.
So if the total amount of cars is going up at 10% a year and the number of dollar bills is only going up at 3% per year, over time, you would expect that dollars now can buy more cars, right?
So the price of a given car in dollars would come down over time, right?
So, I mean, if you just extrapolate that to goods across the whole economy, if more and more stuff is physically produced every year, and that pile of stuff grows faster than the pile of dollars chasing those goods, then prices tend to go down.
But what happens now with fiat money is the amount of dollars tends to rise faster than the amount of stuff.
And so that's why price stickers keep going up and up and up year after year.
Right.
Well, now, okay, so if they mined all the last of the gold and there was no more to dig out of the ground, it had all been turned into jewelry or industry or bricks for the vaults somewhere, would it make sense then to just have a gold standard forever and never let the supply of money increase from now on and prices will just always fall for everything from now on?
Till the end of history?
Yeah, I mean, at some point, maybe it would make more sense to switch to some other commodity to be the base.
I mean, I don't know.
That's a...
But you're saying you don't ever need to expand the base of the money supply, no matter how much expansion in the economy is going on.
Right, exactly, that there's nothing.
I mean, once people adjusted to the new situation, that would just mean that maybe prices instead of falling at 1% per year would in general fall at, you know, 2.3% per year.
And once people knew to expect that, that would be fine.
And they would just build that into their long term contracts and workers would know that, yeah, my wages go down a little bit every year, but prices go down even faster.
So every year, my paycheck can buy more and more at the store.
You know, once people adjusted to that, it wouldn't be a big deal.
And then moreover, there'd be a lot more stability because people would know no central bank can come along and cause a massive boom bust cycle that we have the stability built into it.
Right.
And that's the real trick is, as long as you don't have all these distortions and speculative bubbles that pop and leave so many people stranded, the way this last crash just ruined so many people.
Right, exactly.
And I think that's part of the problem too, right now, that it's sort of an unseen cost of Bernanke's policies and the other central bankers too, is that right now, I mean, just look at how many of your listeners and the people that I associate with, we might be crazy, but we're worried about a massive inflationary outburst in the near future.
And so they're doing stuff like stocking up on gold and silver and all sorts of other, engaging all sorts of hedges to protect themselves instead of just, you know, if you're a business person trying to please your customers, or if you're just trying to get ahead at work and, you know what I'm saying?
So now we're spending a lot of time playing defense for this possible catastrophe that might come along.
Whereas say what you will about the rigidity of the gold standard, you wouldn't have to worry that maybe the dollar is going to lose 90% of its value three years from now, right?
Now a devil's advocate, let me try to, you know, obviously I like you, Bob, but let me be hard on you for a minute.
Wouldn't that hyperinflation can already happen by now, as the effect of the so-called solution to the crash of 2008 that Bernanke embarked on, all the bailouts and all the inflation?
Well, it is true that some sort of people with loose lips on the Austrian side probably did throw out some predictions in the last few years using that term hyperinflation.
I personally have been off, but I mean, I never said, oh yeah, we're going to have hyperinflation in the next 18 months or anything like that.
So I thought you would see prices rising more quickly than they have.
But yeah, I mean, I think most of the Austrians have been pretty responsible and just said this is a bad idea, this is going to lead to a depreciation of the dollar.
Well, yeah, I mean, and let's, for people who aren't familiar with the argument, basically the argument is the crack-up boom, the argument is the end of dollar hegemony in the world and all the dollars and all those vaults around the world come in racing home and $100 bills are worth dimes and every bit of savings in the country is wiped out and a massive catastrophe is distribution breaks down and the division of labor breaks down and people are really screwed.
That's what we're talking about.
Weimar Germany is the danger we're playing with, according to you guys, right?
Yeah, well, yeah, that's certainly one of the dangers.
I mean, that's the worst thing that could possibly happen is that literally the currency collapses.
And the point is, even if there's only a 1% chance of that happening, if Bernanke didn't do the stuff he's been doing, it couldn't happen, right?
Whereas he is opening the door without what he's doing because then if prices do start escalating, getting out of control, I don't think they're going to just turn on about face and do the right thing.
I think they're just going to keep doubling down on it.
And so that's really the issue and the danger is that once they start down this path, it's going to be hard to turn around.
Well, and that's the thing, right?
Is the last time we had a major inflation, like a real bad one, I guess, like economy wide was in the 70s, but the national debt was still low enough that they could turn it around and pay it off or at least pay it down.
They could raise the interest rates.
And I mean, if they raise the interest rates now on our $16 trillion national debt, just the interest payment on the debt would be enough to break the entire budget, right?
Yeah, if interest rates spike, among the other problems it's causing, you're right, it's just the federal government's debt and actually it's pretty...
So they can't turn it around is the point.
They have no other solution they can think of except to just keep printing money.
And then the other issue too is the Federal Reserve itself now has a bunch of dollar denominated assets on its books that are sensitive.
If interest rates spike, then the mortgage-backed securities they're holding and all the treasuries and so on, the market value of those things will go down.
And so in an accounting sense, if the Fed treated its books the way a regular firm does, the Fed could be bankrupt.
Its assets would be less than its liabilities.
And so it's not that Bernanke is going to just resign then and the Fed is going to shut down.
Obviously, they're going to keep printing money because there's no physical constraint on what they want to do.
But I just think that would sort of make regular people who haven't thought about it before wake up and realize there is something really suspicious with this entity that can be bankrupt and yet they just keep printing money.
And so I think that's the thing they're kind of worried about too is if they have to raise interest rates really quickly, it might as an offshoot make the Fed insolvent.
And I think just for public relations reasons, they probably don't want to do that.
Well, and what percent chance is it that you give of a real crack up boom and Ron Paul's warning, the next crisis, the end of the dollar?
It would be silly for me to throw out a number because that would be meaningless, right?
It either is going to happen or it won't.
Well, yeah, you're right.
But I mean, you said for the sake of argument a minute ago in another context, kind of, you said a 1% chance or something.
But I didn't know if you were saying that's what you really thought or whether you thought that, hey, you know, we I mean, like we just covered, they can't turn it around at this point.
They're still going headlong over the cliff right now as their official policy.
Well, I think what they're trying to what could be going on is just think about this in terms of very long term strategy.
Let me put it this way.
If I were in the inner circle and people are asking me, OK, you know, we want to get to get around national sovereignty and we'd really like to have our cadre of of influential people, you know, run in the world kind of deal.
How do we do that?
I mean, one thing is you want to break down these national currencies and have it fall under, you know, the IMF or something with a with a single currency.
So that's I mean, I guess what I'm trying to say is I don't think necessarily that it's going to be an unavoidable downside of their policies.
And oh, yeah.
And by the way, we actually destroyed the dollar.
I mean, it's conceivable to me that they're doing this because that is, you know, in long term part of what helps people who want to want to gain more power for themselves.
So I don't I guess what I'm saying, if they really did want to turn around, they could.
It would just cause a lot of pain.
I mean, just like it'd be like Volcker did in the early 80s, but times 10, let's say.
So, I mean, it's not literally impossible at this point.
It just would be really painful and it would cause, you know, everyone would get wiped out, all the banks would collapse and things like that.
But I don't see them doing that.
And again, I'm thinking maybe it's not even a trade off in their mind, maybe that this is, according to a few people, what they want.
Maybe they don't like the fact that there's always national currencies and it would be so much more convenient if they had, you know, the IMF issuing a currency that everybody in Europe and the US and Canada and Mexico all used.
And so how would you do that?
You could never get Americans voluntarily just to say, oh, yeah, sure, let's use the Amaro and turn in their dollars.
But you could do it if the dollar's crashing.
That would then be a panic situation.
Hey, look, everybody, a new currency we can use that they gave us.
Thanks, politicians.
Right.
So, I mean, if you're asking me, well, gee, how likely do you think?
I mean, I have no idea because these people don't invite me to their conferences, so I don't know.
But I'm just throwing that out there for your more conspiratorial listeners that it's possible to me that if it does happen, it won't be like, oh, they gambled and lost.
Maybe it would be, yep, just like they wanted to happen.
Who knows?
Yeah.
Well, you got to give at least a forty five percent chance or something.
Right.
All right.
We're over time.
Thank you so much for your time, Bob.
Thanks for having me, Scott.
Everybody, that's the great Robert P. Murphy.
Consulting by RPM dot com is this website/blog for the blog there.
You can find them at the Mises Institute and Amazon dot com, his book or whatever, wherever you'd like to buy your books.
They are the Politically Incorrect Guide to Capitalism and the Politically Incorrect Guide to the Great Depression and the New Deal.
And did I say Mises dot org?