WEBVTT NOTE Profits in a Fiat-Currency World 1 00:00:00.000 --> 00:00:08.240 The local women's health symposium had invited a preacher to give them a talk. 2 00:00:08.240 --> 00:00:16.760 When the minister's wife asked about the topic, he was too embarrassed to admit that he was asked to talk about sex. 3 00:00:16.760 --> 00:00:21.600 Thinking very quickly, he replied, I'm going to be talking about sailing. 4 00:00:21.600 --> 00:00:24.280 Oh, that's nice, the wife said. 5 00:00:24.280 --> 00:00:30.380 The next day at the grocery store, a young woman who had attended the lecture approached the minister's wife and said, 6 00:00:30.380 --> 00:00:38.280 that was certainly an excellent talk your husband gave. He's quite an expert and he has a unique perspective on the subject. 7 00:00:38.280 --> 00:00:43.480 Somewhat chagrin, the minister's wife replied, gee, funny that you should think so. 8 00:00:43.480 --> 00:00:53.880 I mean, he's only done it twice. The first time he threw up and the second time his hat fell off. 9 00:00:53.880 --> 00:01:00.880 Being too embarrassed to tell my wife that I was going to speak about gloom and doom again, 10 00:01:00.880 --> 00:01:06.880 I told her that the subject of my speech was going to be 11 00:01:06.880 --> 00:01:11.880 why one should buy junk bonds for one's retirement fund. 12 00:01:11.880 --> 00:01:17.880 If you happen to see her tonight, please don't broach the subject. 13 00:01:17.880 --> 00:01:25.880 Okay, all kidding aside, it's all been said today and it's hard for me now to speak after so many good speakers 14 00:01:25.880 --> 00:01:35.880 and everybody already haven't said something about the bubble economy and unsustainable growth and unsustainable boom 15 00:01:35.880 --> 00:01:46.880 and the coming crash, I imagine that was also mentioned. So even though I agree, it's hard to go over it again. 16 00:01:46.880 --> 00:01:59.640 So maybe I would like to sort of restrict some of my remarks to looking into the basic problem. 17 00:01:59.640 --> 00:02:05.240 The very basic problem is not Mr. Greenspan and it's not any of the central bankers of 18 00:02:05.240 --> 00:02:14.640 the world per se. It's the system. The fiat money system is highly unstable. It's a system 19 00:02:14.640 --> 00:02:44.640 is something that will create over and over a crisis, and you don't have to be a genius, but just look at the evidence, last 30 years, you've had a crisis after crisis after crisis every single year practically, you go back to the late 60s, the inflation, the Vietnam inflation, the 70s, the tremendous inflation in the developed world, the aftermath of parts of those inflations, the 74 credit deflation, 20 00:02:44.640 --> 00:03:14.640 Incredible, incredible deflation, credit deflation, the 1982 credit deflation, the 1985-86-87 boomlet followed by a crash, the 1987 crash, the 1988-89 reflation that created a boom in real estate and of course the disaster that followed with the savings and loans collapse and probably all the banks, almost most of the banks in Texas and Massachusetts 21 00:03:14.640 --> 00:03:23.140 The billions and billions and billions of dollars, hundreds of billions of dollars, use taxpayers' money to clean up the mess. 22 00:03:23.140 --> 00:03:29.640 And that's not just the United States. In the mid-70s, the hyperinflation in Britain, when the IMF was called in, 23 00:03:29.640 --> 00:03:35.640 and the secondary banks all collapsed, all secondary banks collapsed in Britain. 24 00:03:35.640 --> 00:03:44.140 The Latin America hyperinflation of the late 70s, early 80s, which literally destroyed the banking systems in Mexico and Argentina. 25 00:03:44.140 --> 00:03:53.140 Even Brazil at that time. The poverty that ensued after that, the tremendous loss of income, the indebtedness that followed after that. 26 00:03:53.140 --> 00:04:04.140 The mid-80s in the Nordic countries, Sweden, Finland, Norway, 20% of their GDP has been used to pay to clean up that mess. 27 00:04:04.140 --> 00:04:07.140 Almost every single bank in those countries went under. 28 00:04:07.140 --> 00:04:19.140 Every single one, every single part of the world was affected in one way or another by this kind of unstable monetary system, a fiat money system. 29 00:04:19.140 --> 00:04:32.140 And of course the great bubble, the one that we all know, that we all follow every day, the Japanese bubble of the mid to late 80s caused by, again, increases in money that were way above what the economy needed. 30 00:04:32.140 --> 00:04:37.140 At the time, the Japanese central bank did not know that was creating a bubble. 31 00:04:37.140 --> 00:04:40.140 They admitted today. They didn't know it was creating a bubble. 32 00:04:40.140 --> 00:04:47.140 And it's been 10 years since then, and they have not been able to crawl out of it. 33 00:04:47.140 --> 00:04:53.140 So, it's a sad history. It's a very sad history. 34 00:04:53.140 --> 00:04:58.140 And you may want to ask, why does it happen? Why is it that this can happen? 35 00:04:58.140 --> 00:05:12.140 And we have intelligent central banks. They're an intelligent group of people. And they are intelligent. They all have degrees, and some of them have PhDs, and there's nothing wrong with a PhD. I mean, these people are intelligent. 36 00:05:12.140 --> 00:05:27.140 Why should central bankers be so wrong? Why do they cause these kind of things? The truth is that Ludwig von Mises already spoke about this phenomenon 70 years ago when he predicted that the socialist and communist economies would fail, would go under. 37 00:05:27.140 --> 00:05:40.140 And money is the same thing. In a centralized economy, you try to control the amount of shoes and the amount of shirts and the amount of butter that the economy needs and is going to produce. 38 00:05:40.140 --> 00:05:52.140 And they never get it right. Never, never get it right. There's either millions of shoes in a warehouse and a shortage of butter or tons of steel rot in some place and they never get it right. 39 00:05:52.140 --> 00:05:55.140 There's always a shortage of something and a surplus of something else. 40 00:05:55.140 --> 00:06:02.140 Meaning, central authorities, no matter how intelligent they are, cannot create the right amount of anything. 41 00:06:02.140 --> 00:06:07.140 And why should it be any different with money? They are creating money, they're setting a rate. 42 00:06:07.140 --> 00:06:13.140 I mean, think about it. If there would be a gigantic marketing board in this country that would say, 43 00:06:13.140 --> 00:06:17.140 okay, we're going to decide on the amount of bananas that we're going to produce. 44 00:06:17.140 --> 00:06:21.940 and knowing people's taste and population increases and so on. 45 00:06:21.940 --> 00:06:23.440 And they would set a price. 46 00:06:23.440 --> 00:06:25.740 How many times do you think they would get it right? 47 00:06:25.740 --> 00:06:27.140 The answer is never. 48 00:06:27.140 --> 00:06:27.940 They will never get it right. 49 00:06:27.940 --> 00:06:31.940 And yet we have these philosophers, these banking philosophers, 50 00:06:31.940 --> 00:06:38.840 discuss meat, eat our money at these fancy places, 51 00:06:38.840 --> 00:06:44.940 I mean, talk in the press and discuss quarter point increases 52 00:06:44.940 --> 00:06:50.260 and how they can manipulate and fine-tune a price, the price of money, 53 00:06:50.260 --> 00:06:54.820 which is the same thing as manipulating or fine-tuning the price of bananas. 54 00:06:54.820 --> 00:06:57.100 They'll never get it right. 55 00:06:57.100 --> 00:07:02.860 And this is the reason why fiat money systems don't work. 56 00:07:02.860 --> 00:07:05.020 But the evidence is staring us in the face. 57 00:07:05.020 --> 00:07:10.380 And whereas in agriculture, we have given up marketing boards and we have given up price supports 58 00:07:10.380 --> 00:07:12.820 and just about everywhere we have given them up. 59 00:07:12.820 --> 00:07:19.820 and the world has been able to produce food and feed the world without a problem. 60 00:07:19.820 --> 00:07:22.820 When it comes to money, we still persist with the same errors. 61 00:07:22.820 --> 00:07:29.820 The central bank that just manufactures money at its own will, thinking and estimating what the level should be 62 00:07:29.820 --> 00:07:32.820 and estimating what the correct price should be. 63 00:07:32.820 --> 00:07:36.820 It's idiotic. It doesn't make any sense. 64 00:07:36.820 --> 00:07:40.820 So, I don't think I've added very much to what was said before. 65 00:07:40.820 --> 00:07:46.520 I think maybe I said it in a more layman's terms, but this is a serious problem. 66 00:07:46.520 --> 00:07:52.220 This is not just Greenspan and it's not any other central bank, or Duesenberg from the ECB, 67 00:07:52.220 --> 00:07:58.820 or any of these people, who, by the way, you'll note, how many times these people appear in the press. 68 00:07:58.820 --> 00:08:02.020 They are continuously trying to talk a market. 69 00:08:02.020 --> 00:08:06.320 This verbal manipulation that goes on is incredible. 70 00:08:06.320 --> 00:08:10.220 I have to read this stuff every day, and it's unbelievable. 71 00:08:10.220 --> 00:08:16.220 Every single day, one guy says one thing, one central bank, and then another guy says something else, and another Federal Reserve official, 72 00:08:16.220 --> 00:08:20.220 and everything done to manipulate people's expectations. 73 00:08:20.220 --> 00:08:25.220 Now, you don't need that if you had a sound, healthy system. You wouldn't need that. 74 00:08:25.220 --> 00:08:39.220 So, having said that, I probably ended my talk because the profiting from a fiat money system is a little bit too difficult. 75 00:08:39.220 --> 00:08:45.220 I left it to the end. I don't want to leave you with fallible forecasts and temporal truths. 76 00:08:45.220 --> 00:08:52.220 And I'm afraid to taint today's conclusions should my investment recommendations or my investment advice prove wrong. 77 00:08:52.220 --> 00:09:02.220 So what I think I would like to do, and I want to make just one last point before I open it up for questions. 78 00:09:02.220 --> 00:09:20.220 I think that investment success today may have more to do with a subtle understanding of the political climate and the political will than with economic theory. 79 00:09:20.220 --> 00:09:30.220 I make that statement and I say that political analysts with an understanding of Austrian 80 00:09:30.220 --> 00:09:35.700 economics will probably do better in these types of markets than economists and financial 81 00:09:35.700 --> 00:09:46.980 analysts like ourselves and it's a sad point and it's sad to say but I believe it because 82 00:09:46.980 --> 00:09:56.980 Every decision, as we heard before, every decision that is made is a political decision and there has to be a political will to bring the house of cards down and start again. 83 00:09:56.980 --> 00:10:04.980 If there isn't, we can ratchet upwards and continue to ratchet upwards with ever greater degrees of vulnerability. 84 00:10:04.980 --> 00:10:11.980 We went from a Mexico crisis to an Asian crisis to a Russian crisis. Now think about it, a Russian crisis. 85 00:10:11.980 --> 00:10:15.980 Russia is a small player in the world. Less than 1% of GDP. 86 00:10:15.980 --> 00:10:18.980 I don't know what the numbers are. I mean, we don't know what the Russians produce or don't produce. 87 00:10:18.980 --> 00:10:21.980 Probably nothing. Maybe it's a negative GDP. 88 00:10:21.980 --> 00:10:30.980 But that Russia can actually create such havoc that the Fed had to lower rate 75 basis points, 89 00:10:30.980 --> 00:10:36.980 that the markets went into a frenzy, that you couldn't find bids that day or that month. 90 00:10:36.980 --> 00:10:40.980 It just tells you how sick the system is. 91 00:10:40.980 --> 00:10:52.340 We have created enormous leverage in the system, and that's all because the Fed has tampered 92 00:10:52.340 --> 00:10:56.180 with that variable that they don't know how to tamper with, because nobody really knows 93 00:10:56.180 --> 00:10:58.180 how to tamper with that variable. 94 00:10:58.180 --> 00:11:03.660 So having said that, I would like maybe to open the forum for questions, and maybe we 95 00:11:03.660 --> 00:11:08.900 can discuss investment ideas or anything like that, so yeah. 96 00:11:08.900 --> 00:11:18.900 The bank system has a few so-called monopolies that it's quantitatively easy to use. 97 00:11:18.900 --> 00:11:25.900 They've been criticized for that by various market systems and by the Ministry of Finance. 98 00:11:25.900 --> 00:11:31.900 Yet their interest rates are, that I would imagine, well below the so-called natural. 99 00:11:31.900 --> 00:11:33.900 I guess my question is what do you think they're doing? 100 00:11:33.900 --> 00:11:36.900 Is it just, is it just re-eclading or re-eclading? 101 00:11:36.900 --> 00:11:49.900 Japan is undergoing a deflation of assets, and really simultaneously a deleveraging. 102 00:11:49.900 --> 00:11:57.900 So we have this enormous credit that was created during the bubble, and the credit was used to inflate asset prices. 103 00:11:57.900 --> 00:12:03.900 And instead of allowing it to collapse over one day, which it should have done that maybe in 1991, 104 00:12:03.900 --> 00:12:11.900 Press the accelerator, you know, let the whole thing come down and close the banks and close all the banks that were no good, maybe 95% of them. 105 00:12:11.900 --> 00:12:19.900 They extended it and they kept on providing some support all along. So they are deflating very slowly. 106 00:12:19.900 --> 00:12:28.900 The air is coming out very, very slowly. Asset prices have declined now for eight years in a row, if you talk about at least real estate prices. 107 00:12:28.900 --> 00:12:33.900 And on the credit side, for instance, the banking system is liquefying itself. 108 00:12:33.900 --> 00:12:40.900 If you notice the latest figures, let's say for the past year, bank loans are down about 6% or 7% year over year. 109 00:12:40.900 --> 00:12:48.900 Now as the banks are no longer lending, they now are pulling back, consolidating and buying governments. 110 00:12:48.900 --> 00:12:55.900 So their asset side is getting more liquid and more secure and they're writing off that debt, of course with taxpayers' help. 111 00:12:55.900 --> 00:13:01.900 But what's happening is that they're liquefying and there's a credit deflation that's developing. 112 00:13:01.900 --> 00:13:09.900 Now, in a credit deflation of that sort, if the central bank would not create new money, 113 00:13:09.900 --> 00:13:17.900 chances are that you would get a real price deflation too, maybe four or five percent a year price deflation. 114 00:13:17.900 --> 00:13:22.900 The fact is that the Bank of Japan is sort of midway now. They're creating a certain amount of money. 115 00:13:22.900 --> 00:13:30.340 The monetary base is increasing around 4% a year, money supply is not increasing quite that fast. 116 00:13:30.340 --> 00:13:33.140 I think monetary base is increasing, sorry, 8% a year. 117 00:13:33.140 --> 00:13:37.460 Money supply is growing about 3-4% a year, which means there's still leakages in the system. 118 00:13:37.460 --> 00:13:42.420 Something similar to what happened to us in the 30s, where our monetary base was increasing, 119 00:13:42.420 --> 00:13:46.180 but money supply was decreasing because it wasn't sufficient, okay? 120 00:13:46.180 --> 00:13:49.780 And so Japan is sort of playing a midway. 121 00:13:49.780 --> 00:13:54.780 The Central Bank of Japan, I think, has a trauma, a trauma, because of what happened in the 80s. 122 00:13:54.780 --> 00:14:01.780 At that time, in order to resist a rising yen, they monetized, that's what they did, they monetized, 123 00:14:01.780 --> 00:14:10.780 what they did is they intervened and allowed the intervention to expand their money supply and so created a bubble. 124 00:14:10.780 --> 00:14:16.780 So the way I see it is the Bank of Japan is fighting very hard not to do that, not to do more than what they're doing. 125 00:14:16.780 --> 00:14:26.780 They're already doing enough. I would, if I was in their shoes, of course, I would say don't do anything and don't increase the money, but don't decrease it and let everything come down and liquidate it. 126 00:14:26.780 --> 00:14:44.780 But given the political situation, I think the Bank of Japan so far has done a pretty good job, meaning they have inflated a little bit, allowing credit to liquidate, allowing asset prices to come down. 127 00:14:44.780 --> 00:14:49.780 and the fiscal side is the one that has actually provided the support to the economy. 128 00:14:49.780 --> 00:14:58.780 So, in all, I would say that Japan is... 129 00:14:58.780 --> 00:15:07.780 If I would grade it and A is tops and D is failing, I would say Japan is around a C plus to a B at the moment. 130 00:15:07.780 --> 00:15:12.780 The problem is that the brilliant economists all over the world are pouncing on the Bank of Japan 131 00:15:12.780 --> 00:15:22.780 They're saying, why don't you intervene now and create, allow the intervention to inflate the money supply so you can get out of this deflation. 132 00:15:22.780 --> 00:15:29.780 So that new cycle of inflation is not good. 133 00:15:29.780 --> 00:15:32.780 And this is the problem why one can't trade it with a lot of confidence. 134 00:15:32.780 --> 00:15:35.780 And this is why I come back now to the question of politics. 135 00:15:35.780 --> 00:15:41.780 We're not trading economics. We know what the economics are. We know what the economic consequences of that are. 136 00:15:41.780 --> 00:15:57.780 When you talk about trading markets, do you think they can? 137 00:16:11.780 --> 00:16:17.100 accelerates. If inflation were to get over 3 or 4 percent a year, I think there would 138 00:16:17.100 --> 00:16:26.540 be a political will that develops to stop inflating. And then we'll start the liquidating 139 00:16:26.540 --> 00:16:33.420 part of this cycle. Okay, so if LTCM appears again and inflation is 4 percent a year, probably 140 00:16:33.420 --> 00:16:38.560 at that point, if it's not 4, maybe 5 percent a year, probably at that point the Fed will 141 00:16:38.560 --> 00:16:51.560 There's got to be a point at which we can galvanize his politicians and stop the game. 142 00:16:51.560 --> 00:16:56.560 But so far he's been extremely lucky. All we have had is rising prices and stocks. 143 00:16:56.560 --> 00:16:59.560 Everybody likes it. There's nobody that wants to lower prices. 144 00:16:59.560 --> 00:17:04.560 And there's no cost to that. There's no apparent cost to that. 145 00:17:04.560 --> 00:17:06.560 We haven't seen yet an apparent cost. 146 00:17:06.560 --> 00:17:17.560 Now, your point on derivatives is, derivatives is really another form of credit, and tampering with interest rates creates an explosion of credit. 147 00:17:17.560 --> 00:17:26.560 We have leveraged up the system in a phenomenal way, just a phenomenal way. So derivatives is another side of that. 148 00:17:26.560 --> 00:17:33.560 Oliver, in November, in the former Moscow and New York, the November... 149 00:17:35.560 --> 00:17:41.560 Murray was very extreme in that view, that you can actually have non-counterfeit money. 150 00:17:41.560 --> 00:17:46.560 I think that Murray believed in 100% reserve banking, if I recall. 151 00:17:48.560 --> 00:17:51.560 Murray Rothbard, I assume, Murray Rothbard. 152 00:17:51.560 --> 00:17:55.560 Murray Rothbard was one of the great scholars in the Austrian movement. 153 00:17:56.560 --> 00:18:01.560 Am I right that he believed in 100% reserve backing? 154 00:18:01.560 --> 00:18:06.560 Now that's probably a little bit too extreme for the moment. 155 00:18:06.560 --> 00:18:09.560 It's probably too extreme and I think maybe it will take another 75 years. 156 00:18:09.560 --> 00:18:14.560 But it is possible to move away from central banking, that I believe. 157 00:18:14.560 --> 00:18:18.560 And free banking is the alternative, the real alternative. 158 00:18:18.560 --> 00:18:22.560 Free banking that's practiced by the Scottish banks in the 19th century 159 00:18:22.560 --> 00:18:25.560 is a very sound alternative. There's no central banks. 160 00:18:25.560 --> 00:18:28.560 and it works well, it worked very well too. 161 00:18:28.560 --> 00:18:33.560 So there are ways that we can get around or get away from discretion. 162 00:18:33.560 --> 00:18:39.560 The problem here is human discretion, central bankers, 163 00:18:39.560 --> 00:18:42.560 no matter how good they are and how smart they are 164 00:18:42.560 --> 00:18:46.560 and how much their good intentions are, 165 00:18:46.560 --> 00:18:51.560 we still are going to have a problem of manipulation, of getting it wrong. 166 00:18:51.560 --> 00:18:59.560 So, if you can get rid of central banking, and there's ways to do it, and there was a tried way to do it, 167 00:18:59.560 --> 00:19:05.560 19th century banking in Scotland was one of them, that could be one alternative. 168 00:19:05.560 --> 00:19:08.560 I would love to see that. I'd love to see that. 169 00:19:08.560 --> 00:19:15.560 So, I don't know what to say. Maybe if you lived long enough you would have... 170 00:19:15.560 --> 00:19:21.560 You said a few moments ago that you don't trade the economic... 171 00:19:21.560 --> 00:19:27.560 No, no, no, I didn't say that. I trade the economics and I don't do so well. That's the problem. 172 00:19:27.560 --> 00:19:36.560 What I said is that you've got to have a political sense, better than an economic sense in some of these things. 173 00:19:36.560 --> 00:19:44.560 Because you can have this economic scenario, and I can have fainted the same scenario back in 1992 or 1993, 174 00:19:44.560 --> 00:19:52.260 When Greenspan lowered rates of 3 percent, which by everybody's admission was below the natural rate, 175 00:19:52.260 --> 00:19:56.460 and he did that in order to save the banking system, 176 00:19:56.460 --> 00:19:59.960 I could have painted the same scenario and said, this thing is unsustainable, 177 00:19:59.960 --> 00:20:06.060 we are creating an incredible explosion of credit, at some point it's going to collapse, but when? 178 00:20:06.060 --> 00:20:11.960 But when? And I wasn't able to count on, 179 00:20:11.960 --> 00:20:18.760 and, for instance, Greenspan doing what he did in 88, in the name of systemic risk, he reflated, right? 180 00:20:18.760 --> 00:20:23.760 Or just three months earlier, it was tightening, not because the stock market collapsed, he reflated, 181 00:20:23.760 --> 00:20:26.960 or what he did during the Russians' situation. 182 00:20:26.960 --> 00:20:35.960 If you're not an astute political analyst, you will miss it because you will keep on looking at the natural consequences of what's happening 183 00:20:35.960 --> 00:20:41.960 and make decisions and make conclusions, arrive at conclusions that are not going to be realistic very often. 184 00:20:42.960 --> 00:20:47.960 So that's why I say that a good political analyst who understands how, 185 00:20:49.960 --> 00:20:57.960 what's happening now in Washington and what the pressures are and what the central banks are finally reacting to, 186 00:20:58.960 --> 00:21:01.960 may be better in a way than an economic theorist. 187 00:21:01.960 --> 00:21:09.960 I would love to have that trading metagia. I'm looking for that, desperately. 188 00:21:09.960 --> 00:21:16.960 My trading metagia has been basically economic, basically economic. 189 00:21:16.960 --> 00:21:28.960 And in the bull market of the past three years, I mean, I wrote a piece in, what was it, in April of 97, called Fraying at the Edges, 190 00:21:28.960 --> 00:21:35.960 in which I basically laid out the scenario that starting from the outer corners of the periphery, 191 00:21:35.960 --> 00:21:40.960 and that was the beginning, Thailand had not yet exploded, it was just about to, 192 00:21:40.960 --> 00:21:44.960 that the whole thing would catch on fire starting from the periphery because of credit. 193 00:21:44.960 --> 00:21:51.960 And I laid out the whole scenario. Now, it was stopped. It was stopped. 194 00:21:51.960 --> 00:21:55.960 We had what's called muddling through, because you had the World Bank intervene, 195 00:21:55.960 --> 00:22:02.960 The US intervened and the Treasury intervened and they provided help to Indonesia and then to Korea and then to Thailand. 196 00:22:02.960 --> 00:22:07.960 The system was not allowed to fall. That was a political decision at the time. 197 00:22:07.960 --> 00:22:14.960 And this continues. So during that period of time, if you were trading on the basis of economics, you weren't doing well. 198 00:22:19.960 --> 00:22:22.960 That's the best scenario. That would be the best scenario. 199 00:22:22.960 --> 00:22:28.960 If that can happen, you see, the problem is this, that the leverage in the system, 200 00:22:28.960 --> 00:22:37.960 the leverage in the security system, is such that it won't allow, it may not allow the market to deflate slowly, 201 00:22:37.960 --> 00:22:43.960 because you have a lot of derivatives, you have a lot of credit, and it will be difficult for the market to, 202 00:22:43.960 --> 00:22:48.960 it will be difficult, I'm not saying it's not possible, it will be difficult for the market to deflate slowly. 203 00:22:48.960 --> 00:22:56.720 The Japanese example is interesting. If you don't, there's almost like a natural law. 204 00:22:56.720 --> 00:23:02.440 You either have very sharp corrections and they're very short, or you have very long 205 00:23:02.440 --> 00:23:10.000 corrections and they're shallow. So you have one of the two. For instance, the classic 206 00:23:10.000 --> 00:23:13.960 one that I remember because I was involved in trading and talking to the people in government 207 00:23:13.960 --> 00:23:23.720 was in Chile, 1982, there was a tremendous boom, 1978 to 1982, then suddenly there was 208 00:23:23.720 --> 00:23:28.000 a shortage of capital because of the Falkland Island problem and Latin America was cut off 209 00:23:28.000 --> 00:23:35.680 from capital, the boom came to a sudden end, the government refused to monetize, the economy 210 00:23:35.680 --> 00:23:42.360 went into a tailspin, GDP fell 21% from top to bottom, 21%, we're talking about half a 211 00:23:42.360 --> 00:23:55.360 Unemployment went from 5% to 33% in I think less than a year. But it lasted only a year and a half. It went like this, like a V, it went back up. 212 00:23:55.360 --> 00:24:07.360 So if you allow it to liquidate, if it falls quickly and if it goes down, I don't want to use the expression, but if it hits the fan, then it lasts a short period of time. 213 00:24:07.360 --> 00:24:14.360 But you get it over with. If you don't do it that way, you do the Japanese way, it's Chinese torture or Japanese torture. 214 00:24:14.360 --> 00:24:17.360 It's like 10 years. You had a question. 215 00:24:17.360 --> 00:24:21.360 This gentleman was trying to be fortunate. 216 00:24:21.360 --> 00:24:23.360 That's okay? Okay. 217 00:24:23.360 --> 00:24:30.360 Monetizing debt means that the government buys its own debt. 218 00:24:30.360 --> 00:24:38.360 One debt. Central bank, one arm of the government, prints money to buy the fiscal debt, the treasury debt. 219 00:24:38.360 --> 00:24:43.360 And so it's one piece of printed paper in exchange for another piece of printed paper. 220 00:24:43.360 --> 00:24:48.360 And then you have a lot of notes circulating around. Over there, in the back. 221 00:24:52.360 --> 00:24:57.360 Certainly we act faster today, and the certainly larger, the speculative funds, 222 00:24:57.360 --> 00:25:01.640 are certainly larger in relation to resources of central banks, 223 00:25:01.720 --> 00:25:08.680 but they still end up impacting, affecting the one variable 224 00:25:08.760 --> 00:25:11.760 that makes a lot of difference, which is the price of money. 225 00:25:11.840 --> 00:25:19.040 So, to answer your question, markets will react faster today, 226 00:25:19.120 --> 00:25:25.400 but I think that central banks can temporise for a long time 227 00:25:25.400 --> 00:25:34.400 So what we can do, particularly, is to wonder if you can find a more or less cost-effective model. 228 00:25:34.400 --> 00:25:38.400 The theory of the vigilantes, the bond vigilantes. 229 00:25:55.400 --> 00:25:58.400 with a view to what the Fed will do. 230 00:25:58.400 --> 00:26:03.400 And so we have a game of mutual influence. 231 00:26:03.400 --> 00:26:07.400 We're not really trading bonds in a vacuum. 232 00:26:07.400 --> 00:26:12.400 It's like, what the Fed will do next week or two weeks from now will be tightened when it won't tighten. 233 00:26:12.400 --> 00:26:15.400 So the volatility is because of duration. 234 00:26:15.400 --> 00:26:18.400 You have a much longer duration asset. 235 00:26:18.400 --> 00:26:24.400 But the fact of the matter is that they only fluctuate on the basis of what the Fed is going to do. 236 00:26:24.400 --> 00:26:30.400 So, I don't buy the argument that the bond market can do much. The bond market is guided, yes. 237 00:26:30.400 --> 00:26:34.400 Yes, well, let me just read three questions in one if I may, actually a bit. 238 00:26:34.400 --> 00:26:35.400 Neither of the three. 239 00:26:35.400 --> 00:26:36.400 Neither. 240 00:26:36.400 --> 00:26:44.400 No, I think that what I'm trying to do is maybe try to acquire a little bit more, as I said before, political savvy, 241 00:26:44.400 --> 00:26:51.400 trying to read a little bit better the minds of some of these people in terms of what is likely for them to be able to do politically. 242 00:26:51.400 --> 00:26:59.400 Like I think that I detected a shift in Greenspan's June speech in which I think there's a shift there that he wants to bring the stock market down. 243 00:26:59.400 --> 00:27:04.400 He won't accept this market going any higher and he'd probably be happy if the market went to go down 20%. 244 00:27:04.400 --> 00:27:11.400 I assume that number because their calculations are showing that the market is overpriced 20 or 25%. 245 00:27:11.400 --> 00:27:20.400 The tenor of the speech, the references to the stock market, the many references to the stock market, makes me think that that's probably what he's talking about. 246 00:27:20.400 --> 00:27:27.400 So there's like a... I sense a certain political decision, a political will to bring the market down a little bit. 247 00:27:27.400 --> 00:27:31.400 Will he allow it to go down 30-40% or 50% or 60% or 70%? I don't think so. 248 00:27:31.400 --> 00:27:35.400 Not in the first shot. And not unless he's forced by other events. 249 00:27:40.400 --> 00:27:41.400 So, what was the first one? 250 00:27:41.400 --> 00:27:42.400 You repeat the question. 251 00:27:42.400 --> 00:27:44.400 Okay, I'll repeat it. I'll repeat it. They're good questions. 252 00:27:44.400 --> 00:27:52.400 What is likely to bring down the dollar? 253 00:27:52.400 --> 00:27:58.400 His assumption is, and probably not unreasonable, to think that the dollar is a little bit overvalued. 254 00:27:58.400 --> 00:28:03.400 And what can bring it down? That's the question. And what's the catalyst? 255 00:28:03.400 --> 00:28:07.400 I think the US stock market is the key. 256 00:28:07.400 --> 00:28:19.400 I think that the U.S. stock market is the symbol practically for U.S. strength and virility and a breakdown of the stock market will probably cause capitals to flow out. 257 00:28:19.400 --> 00:28:30.400 In other words, the U.S. is financing itself. The U.S. is spending more than it's making. That's a current account deficit. It's getting larger. It's about 3.5% to 4% of GDP. It's pretty large. 258 00:28:30.400 --> 00:28:32.400 How do they finance themselves? 259 00:28:32.400 --> 00:28:35.400 Well, they finance themselves by making a very attractive capital market. 260 00:28:35.400 --> 00:28:40.400 And so foreigners are buying Yahoo, and they're buying Amazon, and they're buying everything else. 261 00:28:40.400 --> 00:28:44.400 I'm pretty clear that there's a confidence in the dollar itself. 262 00:28:44.400 --> 00:28:47.400 Well, the confidence in the dollar comes from the boom. 263 00:28:47.400 --> 00:28:51.400 It's not the dollar first and the boom second. 264 00:28:51.400 --> 00:28:53.400 It's the boom first, the dollar second. 265 00:28:53.400 --> 00:28:54.400 The boom... 266 00:28:54.400 --> 00:28:56.400 Central banks in Thailand holding the dollar? 267 00:28:56.400 --> 00:29:02.400 Sure. No, they're holding dollars because the dollar is 70% of the world's trade, it's in dollars. 268 00:29:02.400 --> 00:29:05.400 Every central bank in the world has to have a certain amount of dollars. 269 00:29:05.400 --> 00:29:09.400 And world trade is about 60-70% invoiced that way. 270 00:29:09.400 --> 00:29:12.400 So don't look at central banks, but look at individuals. 271 00:29:12.400 --> 00:29:14.400 Why do individuals hold dollars? 272 00:29:14.400 --> 00:29:19.400 The main reason is because it's the deepest capital market, the deepest money market, 273 00:29:19.400 --> 00:29:22.400 and the most attractive capital market and money market. 274 00:29:22.400 --> 00:29:24.400 It's where you make money. 275 00:29:24.400 --> 00:29:29.900 And when that stops, and when that stops, the dollars flow out. 276 00:29:29.900 --> 00:29:33.840 And the amount of dollars that flow out will not allow us to, will not allow the U.S. to 277 00:29:33.840 --> 00:29:39.080 finance its current account deficit, at which point the dollar begins to fall. 278 00:29:39.080 --> 00:29:41.800 So it's intimately related. 279 00:29:41.800 --> 00:29:46.000 And I believe that if you want to be short dollars, you probably have to first be short 280 00:29:46.000 --> 00:30:02.000 I'm not sure the dollar is strong, but the US economy has been the strongest and the most performing economy so far. 281 00:30:02.000 --> 00:30:08.000 Europe has been very weak, high unemployment, a lot of problems, labor problems. 282 00:30:08.000 --> 00:30:15.000 Japan has been in a depression practically, so there is no economy that is attractive enough. 283 00:30:15.000 --> 00:30:20.000 The most attractive economy in the world is the U.S., has been the U.S., and this is why dollars come here. 284 00:30:22.000 --> 00:30:24.000 Now, what was your second? 285 00:30:24.000 --> 00:30:35.000 My views on gold change quite radically in the last two years, I think two and a half years, maybe a little bit more. 286 00:30:35.000 --> 00:30:42.000 When it became obvious to me that the central banks of the world had finally made a rational decision, 287 00:30:42.000 --> 00:30:54.000 are national in the sense of where they stood. They stood in a floating rate regime that does not need reserves, does not require reserves, doesn't require gold, doesn't require anything. 288 00:30:54.000 --> 00:31:01.000 You can have a central bank with no reserves if it's a floating rate regime and if it's clean floating. 289 00:31:01.000 --> 00:31:11.000 So the decision that they made, which began with the decision made by Holland and then by Belgium and then Canada has been doing it for 15, 20 years, 290 00:31:11.000 --> 00:31:14.000 and the Bank of England, Australia, Argentina. 291 00:31:14.000 --> 00:31:18.000 Disposing the gold, there's 12 to 15,000 tons of gold in central bank holdings. 292 00:31:18.000 --> 00:31:24.000 That's a lot of gold. It's about maybe five, six, seven years worth of usage. 293 00:31:24.000 --> 00:31:33.000 So I began to realize that demonetization, the end of gold as being a monetary asset, 294 00:31:33.000 --> 00:31:40.000 would imply lower prices for some time until the process of the monetary asset 295 00:31:40.000 --> 00:32:04.000 Until the process is ended and I don't see any good process for gold until, and this is very important, until we get all the central banks that want to sell, get together and pool the gold together, maybe through the BIS, the Bank for International Settlements or the IMF, and auction it off over five years. 296 00:32:04.000 --> 00:32:11.000 At that point, the announcement will make the price of gold go down, but that will be the end of the bear market. 297 00:32:11.000 --> 00:32:17.000 So, what has got to happen, I think you've got to think in terms of production. 298 00:32:17.000 --> 00:32:24.000 Gold production continues to increase year after year. Even this past year, gold production increased, which is remarkable. 299 00:32:24.000 --> 00:32:31.000 The price has gone down 50% in the past two and a half years, and the production continues to increase. 300 00:32:31.000 --> 00:32:37.000 Central bank selling will have to displace production. 301 00:32:37.000 --> 00:32:41.000 We'll have to displace it in order to be able to absorb that central bank selling. 302 00:32:41.000 --> 00:32:46.000 So we'll have to have production cuts of 20, 30, 40% to absorb that selling that's taking place. 303 00:32:46.000 --> 00:32:49.000 It's a lot of selling taking place. 304 00:32:49.000 --> 00:32:54.000 Yeah, but at lower prices, at falling prices. 305 00:32:54.000 --> 00:32:59.000 If you want to stop the falling prices, then you have to replace it completely. 306 00:32:59.000 --> 00:33:06.400 So at some point, you need to have production of gold go down from 3,500 tons a year, from 307 00:33:06.400 --> 00:33:12.880 3,000 tons a year to maybe 1,200, 1,400 tons, and accommodate continued central bank selling. 308 00:33:12.880 --> 00:33:25.760 So what was your third question? You know, you're 100% right. I mean, what he's saying, 309 00:33:25.760 --> 00:33:27.480 I'm going to repeat it because it's important. 310 00:33:27.480 --> 00:33:32.240 He's saying that I made a statement that politics is very important at this point in time, 311 00:33:32.240 --> 00:33:39.600 but in the long run, economic theory will always will out, like they say, value will out, and it's true. 312 00:33:39.600 --> 00:33:44.200 The problem is that we trade, timing is important for us. 313 00:33:44.200 --> 00:33:50.400 We may be right, but we're dead, so we have to time it better. 314 00:33:50.400 --> 00:33:55.840 And ultimately, this, what happened in the past five years, will end in disaster. 315 00:33:55.840 --> 00:33:57.560 There's absolutely no doubt. 316 00:33:57.560 --> 00:34:03.320 Whether we have a credit deflation or whether we have some acceleration of inflation, 317 00:34:03.320 --> 00:34:07.400 but this will end in disaster, what happened in the past five years. 318 00:34:07.400 --> 00:34:11.200 But when? And I don't want to be, you know, short of the wrong time. 319 00:34:11.200 --> 00:34:13.480 Mr. Menger, can you follow up with this question first? 320 00:34:13.480 --> 00:34:18.400 It seems that the survival of an athlete is one thing. 321 00:34:18.400 --> 00:34:19.960 I'll tell you something interesting. 322 00:34:19.960 --> 00:34:33.960 I heard, and I don't know if it's true, but I heard that most of the losses that took place in the Great Depression, investment losses, were not losses suffered in the first round. 323 00:34:33.960 --> 00:34:39.960 There were people who lost money because they thought prices were cheap over the subsequent four years. 324 00:34:39.960 --> 00:34:44.960 And that's where most of the losses took place. You know, maybe it's anecdotal, but it makes sense. 325 00:34:44.960 --> 00:34:52.960 I think that's the difference. There will be the difference between the political players and the ones who have some economic sense. 326 00:34:52.960 --> 00:34:58.960 The pure political players will look at what's called the presidential cycle, they will look at things of that sort, they will say, 327 00:34:58.960 --> 00:35:03.960 well, there's been a will now, some political will, to bring down the bubble. 328 00:35:03.960 --> 00:35:10.960 And then when the bubble goes down and deflates a little bit, they'll jump back in and say, that's it, it's over. 329 00:35:10.960 --> 00:35:16.640 But if you understand the process, you may be able to survive a lot longer. 330 00:35:16.640 --> 00:35:20.560 So economics is very important. You have to marry it. 331 00:35:20.560 --> 00:35:23.400 So when you say that political analysts are very, very good, 332 00:35:23.400 --> 00:35:28.480 if they have the proper economic background to them. 333 00:35:28.480 --> 00:35:31.240 It seems to me that in the late 70s, the Fed went monetarist. 334 00:35:31.240 --> 00:35:36.400 There were a number of changes in the 70s. 335 00:35:36.400 --> 00:35:39.560 In the latter part of the 70s, the Fed went monetarist, 336 00:35:39.560 --> 00:35:45.080 which had decided that the best thing to do was to follow Milton Friedman 337 00:35:45.080 --> 00:35:49.280 and just to look and regulate the growth of money supply. 338 00:35:49.280 --> 00:35:54.120 By the very late 70s, inflation had gotten out of hand and then Paul Volcker, 339 00:35:54.120 --> 00:35:58.440 and I think today if I look back at that time, I didn't realize how courageous he was, 340 00:35:58.440 --> 00:36:03.480 but he applied the brakes and he managed by way of, 341 00:36:03.480 --> 00:36:07.160 I think he managed by way of reserves, excess reserves in the system. 342 00:36:07.160 --> 00:36:13.000 But whatever the case is, he provided much less reserves to the system. 343 00:36:13.000 --> 00:36:16.320 There was a crunch, and interest rates, if you remember, went up to 20%. 344 00:36:16.320 --> 00:36:20.400 They gave up monetarism, and almost after that, two or three years later, 345 00:36:20.400 --> 00:36:24.360 they gave up monetarism because they found very little correlation 346 00:36:24.360 --> 00:36:27.760 between the measures of money supply that they were looking at 347 00:36:27.760 --> 00:36:31.000 and economic activity and inflation. They gave it up. 348 00:36:31.000 --> 00:36:35.720 And the Greenspan years are years of pure discretion. 349 00:36:35.720 --> 00:37:05.220 How can you compare that to writing a paper for the Federal Reserve in the middle of the year? 350 00:37:05.720 --> 00:37:08.120 Which monetary system would be better? 351 00:37:08.120 --> 00:37:13.960 It's hard to judge it independently because one group draws on another group. 352 00:37:13.960 --> 00:37:19.840 For instance, the Volcker experiment, what Volcker did by basically saying that he will 353 00:37:19.840 --> 00:37:24.600 end inflation and raising interest rates of 20% and then bringing on the depression of 354 00:37:24.600 --> 00:37:31.000 82, he created a tremendous amount of credibility for the Fed at that point. 355 00:37:31.000 --> 00:37:35.240 The Fed had shown that it will not allow inflation. 356 00:37:35.240 --> 00:37:43.040 Now, Greenspan has drawn on that credibility for many years, so it's hard to say whether his system is any better. 357 00:37:43.040 --> 00:37:51.240 I mean, what he's done is benefited from the extraordinary credibility of the Fed gain at that point. 358 00:37:51.240 --> 00:37:56.240 So I can't decide. 359 00:37:56.240 --> 00:37:59.240 and Chewing a Destined Corpse. 360 00:38:16.240 --> 00:38:20.240 So it's not just deciding, well, I have to look for the politics... 361 00:38:26.240 --> 00:38:37.240 I don't know when the music stops. Not to participate, I wouldn't go along with it, but I would want to know when it stops, I want to know when that will, that political will has changed. That's what I mean. 362 00:38:37.240 --> 00:38:49.240 I just wouldn't be short until such time as I get an idea. You wanted to ask me something before. 363 00:38:49.240 --> 00:38:53.240 What are the two possibilities of a short, sharp drop? 364 00:39:19.240 --> 00:39:27.240 I don't know the politics behind that either, but I would imagine that the powers-to-be don't want the big banks to fail, the big investment banks to fail either. 365 00:39:29.240 --> 00:39:36.240 Just getting back to gold for a second. Some people would argue that price of gold wouldn't be determined by the monetary system. 366 00:39:36.240 --> 00:39:42.240 Well, you know, the question, the gold question is both a relative and an absolute question. 367 00:39:42.240 --> 00:39:50.240 I would say that given what I've mentioned before, the demonetization process, 368 00:39:50.240 --> 00:39:55.240 that gold will either fall in absolute terms or at least fall in relative terms. 369 00:39:55.240 --> 00:40:03.240 So in your scenario, if we had a re-acceleration of inflation and commodity prices were going up, 370 00:40:03.240 --> 00:40:08.240 you shouldn't be betting on gold. You should be buying live cattle or pork bellies or silver or something, 371 00:40:08.240 --> 00:40:12.240 because gold will be depressed by its relative supply problem. 372 00:40:12.240 --> 00:40:17.240 So, you know, it's true, by the way, that markets have bought, from an investment point of view, 373 00:40:17.240 --> 00:40:19.240 this is much less buying of gold. 374 00:40:19.240 --> 00:40:26.240 Markets have bought the idea of low inflation and financial assets that compensate you for it. 375 00:40:26.240 --> 00:40:32.240 You can do very much better than the tips that these treasury index linked securities, 376 00:40:32.240 --> 00:40:37.240 these inflation index linked securities, they pay you 4% a year, index to the rate of inflation. 377 00:40:37.240 --> 00:40:43.240 That's pretty good. But the amount of the jewelry demand is tremendous. 378 00:40:43.240 --> 00:40:48.240 We are absorbing enormous amounts of producer selling and government selling. 379 00:40:48.240 --> 00:40:53.240 It's tremendous. I agree. Investment buying is not strong. 380 00:40:53.240 --> 00:40:59.240 Investment buying is not strong. What's strong is jewelry, fabrication demand. 381 00:40:59.240 --> 00:41:11.040 I made a point about investment, because I think he was talking about a demand for money, for gold as money, or as fear, in case of another inflation. 382 00:41:11.040 --> 00:41:17.240 The investment demand is dead, but the jewelry demand is very strong, and it's going to absorb all the supply, but it's going to take time. 383 00:41:17.240 --> 00:41:22.240 You're going to have to sell all that gold. 384 00:41:22.240 --> 00:41:29.240 Almost every major stock market crash has been preceded by an inverted yield curve? 385 00:41:52.240 --> 00:42:11.240 It's possible to have a very large decline without an inverted yield curve, but surely if you get an inverted yield curve, and we're close, you know this, we are close, surely if you get an inverted yield curve, you better get out. 386 00:42:11.240 --> 00:42:16.240 What I understand is the Austrian explanation for the term low inflation rate is... 387 00:42:16.240 --> 00:42:20.240 I'm not sure that that's the Austrian view. I think that that's the popular view. 388 00:42:20.240 --> 00:42:29.240 And it may not be wrong that imports are maintaining a sort of a damper on prices. 389 00:42:29.240 --> 00:42:32.240 And you can see that because your current account deficit is getting larger. 390 00:42:32.240 --> 00:42:37.240 Your trade deficit gets larger and larger, so it's maintaining some kind of a damper, right? 391 00:42:37.240 --> 00:42:41.240 But it will start working the other way. When the dollar... 392 00:42:41.240 --> 00:42:44.240 This is the sequence, and I started mentioning it to him. 393 00:42:44.240 --> 00:42:48.240 The sequence is, the stock market comes down, the dollar goes down. 394 00:42:48.240 --> 00:42:51.240 When the dollar goes down, the price inflation goes up. 395 00:42:51.240 --> 00:42:56.240 So inflation will follow, because we have repressed inflation with a very strong dollar. 396 00:42:56.240 --> 00:42:59.240 So as the dollar goes down, the inflation will come out of the system. 397 00:42:59.240 --> 00:43:03.240 Instead of 2% inflation, you may have 4 or 5% inflation. 398 00:43:08.240 --> 00:43:11.240 What about deflation in prices, by the way? There is no such a thing in our system. 399 00:43:11.240 --> 00:43:32.240 So how would that impact us? How would that matter? 400 00:43:32.240 --> 00:43:35.360 So, how would that impact us? How would that matter? 401 00:43:35.360 --> 00:43:40.080 Be very bad. It could be very bad. I mean, you can have business failures, 402 00:43:40.080 --> 00:43:45.600 I mean, huge business failures, unemployment rising. I don't need to paint the picture. 403 00:43:45.600 --> 00:43:49.200 I mean, it could be really bad. Go back to 74. See what happened in 74. 404 00:43:49.200 --> 00:43:56.800 In 74, you had a very classic. You had inflation, and then at the end of that period, 405 00:43:56.800 --> 00:44:02.000 And the recession of 1974 was very severe. Unemployment rose above 10 percent. 406 00:44:02.000 --> 00:44:05.800 Why didn't we get a general inflation? 407 00:44:05.800 --> 00:44:08.200 Because money supply doesn't really go down. 408 00:44:08.200 --> 00:44:12.800 The only other time that you ever had deflation, price deflation was in the 30s. 409 00:44:12.800 --> 00:44:16.400 And that's because the money supply was cut by a third. 410 00:44:16.400 --> 00:44:21.500 If money supply doesn't change, then you can get asset deflation. 411 00:44:21.500 --> 00:44:24.300 Asset deflation, houses, stock prices. 412 00:44:24.300 --> 00:44:30.300 But the car fare, the room in the hotel, the things like that, so we're not changing very much. 413 00:44:30.300 --> 00:44:34.300 You're not going to get real deflation. 414 00:44:34.300 --> 00:44:38.300 Deflation and inflation are monetary phenomena. 415 00:44:38.300 --> 00:44:42.300 If there's no change in money supply, then you're not going to get it. 416 00:44:42.300 --> 00:44:45.300 In fact, if the Fed hadn't inflated for the past 10 years, 417 00:44:45.300 --> 00:44:51.300 chances are that we would have had a deflation of prices of 3-4% a year. 418 00:44:51.300 --> 00:44:56.800 Because productivity has been very strong, very high, and we would have had a wonderful, wonderful situation. 419 00:44:56.800 --> 00:45:01.800 People who lent money would have gotten back more than what they lent. 420 00:45:01.800 --> 00:45:03.800 The lenders would have been in great shape. 421 00:45:03.800 --> 00:45:07.800 The borrower is not so good, but the lenders would have been in great shape, from the lender's point of view. 422 00:45:07.800 --> 00:45:12.800 If the Fed would not have inflated money, you would have had price deflation. 423 00:45:42.800 --> 00:45:48.800 I would never buy a 30-year government bond, but maybe I would buy those index-linked bonds, 424 00:45:48.800 --> 00:45:52.800 because I'm guaranteed that I will not lose money because of inflation. 425 00:45:52.800 --> 00:45:56.800 Of course, taxes are a problem. They tax the inflation gain. 426 00:45:56.800 --> 00:46:03.800 I mean, that's... I hope we better set it off for a little bit. Thank you very much.