WEBVTT NOTE Only the Austrians Understand Interest Rates 1 00:00:00.000 --> 00:00:08.000 Our next speaker is an adjunct scholar at the Mises Institute, a faculty member at Mises University. 2 00:00:08.000 --> 00:00:13.320 He's written a number of books for us. 3 00:00:13.320 --> 00:00:21.160 He's written the Study Guide to Man, Economy and State, Study Guide to Human Action. 4 00:00:21.160 --> 00:00:28.320 He's written the Politically Incorrect Guide to Capitalism, Politically Incorrect Guide to the Great Depression, the New Deal. 5 00:00:28.320 --> 00:00:44.320 He's working on a new book for us that's called Lessons for the Young Economist that we think will be a great hit with young people and with homeschoolers. 6 00:00:44.320 --> 00:00:57.320 And he's also an instructor in the Mises Academy, which is a program we just started, and he's teaching a course online about the business cycle. 7 00:00:57.320 --> 00:01:10.320 and amazingly he has over 200 students from all over the world so he's the one who's broken ground with that and he's talking about only the Austrians understand interest rates. 8 00:01:10.320 --> 00:01:22.320 Please help me welcome Robert Murphy. 9 00:01:22.320 --> 00:01:28.620 Thank you, Doug. Thank you, everyone, for being here. It's a pleasure to be here. This is one of the nicer places I've ever stayed. 10 00:01:28.620 --> 00:01:35.520 Normally, when the Mises Circle travels around the country, Doug puts us up in a Motel 6, so this is a very pleasant surprise. 11 00:01:35.520 --> 00:01:44.920 All joking said, it really is impressive when we go out and do these things and just fill up these rooms of hundreds of people who come out. 12 00:01:44.920 --> 00:01:50.620 I have some family on Long Island, so I got in yesterday and was out with them, and they knew I was in town for a conference. 13 00:01:50.620 --> 00:01:54.260 And then when I was talking to them and they realized it was going to be today, they said, 14 00:01:54.260 --> 00:01:56.340 people turn up on a weekend to hear that kind of stuff? 15 00:01:56.340 --> 00:01:59.300 And I said, yeah, it's interesting. 16 00:01:59.300 --> 00:02:04.220 I mean, of course, what they didn't realize is that when you come to these things, you 17 00:02:04.220 --> 00:02:07.420 hear Doug French talking about dopamine and financial pornography. 18 00:02:07.420 --> 00:02:11.940 So that was the little inside secret that a lot of the outside world doesn't realize. 19 00:02:11.940 --> 00:02:14.380 It's not all just about interest rates. 20 00:02:14.380 --> 00:02:18.660 So speaking of interest rates, though, that's what my topic is for you today. 21 00:02:18.660 --> 00:02:48.660 and it's a bit of a presumptuous title, we'll admit, that only Austrians understand interest rates, but I think by the time I'm done, I hope you at least see where we're coming from, that it's really even, you know, it's a Chicago school type, you watch CNBC and you see certain, you know, Larry Kudlow or whatever, free market guys or you read Thomas Sowell and things like that, free market guys that they would agree with the Austrians on many things, like if it were price controls or deficit 22 00:02:48.660 --> 00:02:54.100 Spending, certainly any aspect of standard Keynesianism, we're both on the same side. 23 00:02:54.100 --> 00:02:58.980 But yet when it comes to interest rates, even if we have the same conclusion on something, 24 00:02:58.980 --> 00:02:59.980 the reasoning is different. 25 00:02:59.980 --> 00:03:04.100 So that's what I want to try to elaborate on right now in this talk. 26 00:03:04.100 --> 00:03:07.620 And then later on, Joseph Salerno, when he's going to talk to you about Austrian business 27 00:03:07.620 --> 00:03:12.500 cycle theory in relation to the overconsumption boom, you'll see the same lesson applied. 28 00:03:12.500 --> 00:03:16.980 So I just want to make sure you understand what the Austrians think of when it comes 29 00:03:16.980 --> 00:03:17.980 to interest rates. 30 00:03:17.980 --> 00:03:47.980 Let me just give you an analogy. Suppose that on Monday, Ben Bernanke has a press conference and he announces a new Fed policy. He says, you know, I am the other policy makers here. We've been monitoring the situation in the Gulf with this oil spill and we know that people are concerned if that continues, you know, oil prices might go up and that's going to just choke off this recovery in its infancy. And we also know that people are struggling. I've been talking with President Obama. He's very concerned about, you know, the middle class and the poor and how 31 00:03:47.980 --> 00:03:51.620 rising gas prices this summer would really just be devastating to a lot of 32 00:03:51.620 --> 00:03:55.780 households who are already struggling and so what we're going to do this new Fed 33 00:03:55.780 --> 00:04:00.300 policy is we're going to start buying oil from all the major producers around 34 00:04:00.300 --> 00:04:06.220 the world and then we're going to set up arrangements with US oil companies so 35 00:04:06.220 --> 00:04:10.100 that we'll sell the oil to them at ten dollars a barrel and we're going to do 36 00:04:10.100 --> 00:04:15.140 what we can within limits you know gauge by the the takers we get when we 37 00:04:15.140 --> 00:04:17.940 auction it off because presumably we're expecting we're going to have have a 38 00:04:17.940 --> 00:04:21.940 A few people show up if we're selling oil at $10 a barrel. That's just our guess. 39 00:04:21.940 --> 00:04:28.940 And as much oil as we can get from these producers around the world, they will go up to capacity 40 00:04:28.940 --> 00:04:32.940 and pump as fast as they can and then we will just transfer and sell oil for $10 a barrel 41 00:04:32.940 --> 00:04:38.940 to select U.S. oil companies so that will, of course, push down the world price of oil significantly. 42 00:04:38.940 --> 00:04:43.940 In particular, it will push down gasoline prices for U.S. consumers. 43 00:04:43.940 --> 00:04:50.940 And so that's what the Fed's going to do. You know, everyone's in this together and that's our contribution to help make sure the recovery goes forward. 44 00:04:50.940 --> 00:04:59.940 Now, if they did announce that, I mean, you can imagine, some people, of course, are going to think it's great, just because by definition anything Bernanke says is genius, right? 45 00:04:59.940 --> 00:05:09.940 But beyond that, you could imagine a lot of the free market type analysts and commentators would say, that sounds like the most insane recommendation I've ever heard in my life. 46 00:05:09.940 --> 00:05:13.500 in Life. And they would, you know, the commentators would say, well, why? What's wrong with that? 47 00:05:13.500 --> 00:05:18.180 And they say, well, where do you even begin? First of all, that's going to cause massive inflation, right? 48 00:05:18.180 --> 00:05:36.100 That, I mean, the Fed's going to have to just print up all kinds of new money or technically just write checks on the Fed to give to, you know, these OPEC countries and other producers to buy the oil from them at what currently is the market price. And again, they'll sell as much as they can if the Fed's willing to buy it. 49 00:05:36.100 --> 00:05:39.260 and then but but suppose that didn't happen suppose they put the plan in place 50 00:05:39.260 --> 00:05:44.500 and these OPEC countries and other producers just keep piling up the 51 00:05:44.500 --> 00:05:48.220 dollars in their bank account you know they just had accounts with the Fed just 52 00:05:48.220 --> 00:05:52.860 get huge you know over a trillion dollars in six months I mean I'm just 53 00:05:52.860 --> 00:05:55.540 being crazy that that would never happen you know that the Fed wouldn't just 54 00:05:55.540 --> 00:05:58.540 create a trillion dollars in six months but imagine this is a thought experiment 55 00:05:58.540 --> 00:06:02.860 okay so suppose that were to happen and then you could imagine people looking at 56 00:06:02.860 --> 00:06:08.300 you know, going to the St. Louis Fed's website and looking at the spike in the dollar reserves 57 00:06:08.300 --> 00:06:12.060 at the Fed and they say, you know, is the world going to blow up? How can that be possible? 58 00:06:12.060 --> 00:06:16.340 But, you know, prices at the grocery store haven't gone up and they say, oh, I guess 59 00:06:16.340 --> 00:06:20.140 maybe it's okay. And then you could say, oh, yeah, so maybe massive inflation didn't hit 60 00:06:20.140 --> 00:06:24.460 from this, but still, that's, I mean, just all the corruption that, of course, you know, 61 00:06:24.460 --> 00:06:28.580 the Federal Reserve picking certain U.S. companies, the ones to get these sweetheart deals and 62 00:06:28.580 --> 00:06:32.460 get oil sold to them at $10 a barrel and, of course, their profits would be going through 63 00:06:32.460 --> 00:06:39.460 The Theory of Money and Credit 64 00:07:02.460 --> 00:07:06.460 If you can't trust central bankers and the heads of oil companies, who can you trust? 65 00:07:06.460 --> 00:07:16.460 And again, I'm sure everyone but two people in here understands the analogy, but just make sure I'm not losing anyone. 66 00:07:16.460 --> 00:07:24.460 Of course, in our time, again, heads of major investment banks or whatever, people in and out of Goldman Sachs, those are the salt of the earth. 67 00:07:24.460 --> 00:07:32.460 Sometimes they make mistakes, but it's only because it was an intellectual error and they had our best interest at heart. 68 00:07:32.460 --> 00:07:44.460 That would be the 30-second soundbite stuff in terms of the CNBC, but in terms of people writing op-eds or various think tanks, 69 00:07:44.460 --> 00:07:51.460 writing longer pieces summarizing just how insane this new oil policy was, I think a lot of them eventually would come around to the fact 70 00:07:51.460 --> 00:07:55.460 and the fact that, look, this is supposed to be a market economy and prices actually mean something. 71 00:07:55.460 --> 00:08:01.460 The world price of oil being whatever it was at the time of the announcement, $75, $70 a barrel, 72 00:08:01.460 --> 00:08:04.460 that meant something. It had something to do with supply and demand. 73 00:08:04.460 --> 00:08:12.460 And if the Fed pushes that down, so maybe the new world oil price after this new policy is put in effect gets pushed down to $40, let's say. 74 00:08:12.460 --> 00:08:18.460 And that some companies, of course, are getting it at $10, and other ones aren't, but on average the price gets pushed down to $40. 75 00:08:18.460 --> 00:08:23.740 And you say, that's going to screw things up, and maybe gasoline prices get pushed down to a dollar a gallon. 76 00:08:23.740 --> 00:08:27.940 And you say, those are the wrong prices, that doesn't accord with supply and demand. 77 00:08:27.940 --> 00:08:30.300 And you say, well, so what? What are the consequences? 78 00:08:30.300 --> 00:08:35.220 You can imagine someone thinking, you know, I'm driving my car and I like the fact that gas prices are lower, 79 00:08:35.220 --> 00:08:39.180 and you warned about inflation, I didn't see that yet at the grocery store, so what's the big deal? 80 00:08:39.180 --> 00:08:43.940 And an economist, you know, a very stuffy economist, could explain, matter of fact, well, 81 00:08:43.940 --> 00:08:46.380 no, those prices mean something, and it's screwing things up. 82 00:08:46.380 --> 00:09:16.380 For example, we're using far more oil now than we otherwise would have, and the oil's a finite resource, there's only so much of it in the ground, and if we're burning more now, that leaves less available for future use, whereas in a market economy, if the prices aren't interfered with, one thing that the current spot price of oil does is it sort of regulates the use, it rations it, right? And if people expected there to be a shortage in the future, the price would go up now to make us cut back on our current consumption, and so you screw that 83 00:09:16.380 --> 00:09:20.300 mechanism up that rationing approach up if you push down the prices in the 84 00:09:20.300 --> 00:09:24.100 president makes you use more oil now than you ought to be using so it's not a 85 00:09:24.100 --> 00:09:28.660 question of doing a favor for the consumer while you're doing now is 86 00:09:28.660 --> 00:09:32.700 benefiting people now and hurting them down the road because now they're using 87 00:09:32.700 --> 00:09:37.820 up too much oil and it has other effects to that the artificially low price of 88 00:09:37.820 --> 00:09:41.860 gasoline is going to cause people to buy less fuel-efficient cars than the 89 00:09:41.860 --> 00:09:44.700 otherwise would have so people are going to be more likely to buy SUVs and so 90 00:09:44.700 --> 00:09:48.700 and so forth than they otherwise would have and if this if it were the correct 91 00:09:48.700 --> 00:09:52.500 market price that would be fine but it's not the right market price and in 92 00:09:52.500 --> 00:09:55.700 particular what's going to happen eventually the Fed when inflation kicks 93 00:09:55.700 --> 00:09:59.260 in or some other reason kicks in the feds gonna abandon this policy and then 94 00:09:59.260 --> 00:10:02.380 when prices shoot up people are going to be stuck with these gas guzzlers so to 95 00:10:02.380 --> 00:10:05.820 speak and they're going to see gasoline prices a lot higher all right and so you 96 00:10:05.820 --> 00:10:09.380 can imagine them just talking through all of the different problems and of 97 00:10:09.380 --> 00:10:13.300 course there'd be all the issues of arbitrage and the companies getting the 98 00:10:13.300 --> 00:10:16.980 the barrels at ten dollars and then just selling them to somebody else. 99 00:10:16.980 --> 00:10:20.660 You can just imagine, it would be a nightmare. There would be so many economic distortions 100 00:10:20.660 --> 00:10:23.660 introduced by this policy. And I think 101 00:10:23.660 --> 00:10:27.500 not just Austrians but other free market economists would see that and they would 102 00:10:27.500 --> 00:10:28.720 go ahead and 103 00:10:28.720 --> 00:10:30.220 and spell these things out. 104 00:10:30.220 --> 00:10:33.740 Now the policy might go through it. I'm actually concerned that if the Austrian 105 00:10:33.740 --> 00:10:36.820 School gets more popular and this lecture is on YouTube that 106 00:10:36.820 --> 00:10:40.740 somebody in Bernanke's staff might say, I just heard a fantastic idea. 107 00:10:40.740 --> 00:10:45.940 you know let's let's have a meeting so it's sort of like you know if you're a 108 00:10:45.940 --> 00:10:49.340 novelist everyone or that like that like the guys that it like come up with with 109 00:10:49.340 --> 00:10:52.500 crime thrillers and they have like ways that serial killers get away with so do 110 00:10:52.500 --> 00:10:54.660 you wonder sometimes if they think I don't want to give somebody an idea well 111 00:10:54.660 --> 00:10:59.860 that's that's what we have here when we talk about hypothetical fed policy so the 112 00:10:59.860 --> 00:11:04.600 so that would be the problem and then but again this is the same thing carries 113 00:11:04.600 --> 00:11:08.020 over with interest rates and yet the Austrians are really among the few 114 00:11:08.020 --> 00:11:38.020 people, although I was pleased to see the previous speaker mention that too when he was saying, you know, interest rates at 0%, what does that even mean? And I had a guy call me Bill Barnett, who's an economist down at Loyola in New Orleans, and when the Fed first had pushed interest rates down, you know, between 0 and 0.25 or whatever the official range was, and he was calling me talking about some issue of the Fed's balance sheet, and he just said, you know, Bob, what does that even mean, that interest rates are zero? He said, did they abolish scarcity, you know? 115 00:11:38.020 --> 00:12:02.020 And I was like, I don't know, did they? But that's part of it. So what are interest rates? Well, first of all, they're prices. That's a price. In the market, if the Fed didn't intervene, the interest rate, in a sense, in the Austrian view, is a signal, if you will, sort of regulating people's impatience. 116 00:12:02.020 --> 00:12:32.020 Alright, and it has to do with what the Austrians call time preference, meaning the trade-off between being able to consume now or postponing the consumption, but with the reward that you get more down the road, right, so that's what the interest rate serves to regulate, if you will, just like the price of oil controls or rations, how much we consume now versus how much you leave in the ground to be available down the road, the same thing, interest rates do that for capital funds in general. 117 00:12:32.020 --> 00:12:37.580 and there's it so it's not just about money and and unit a unit of account 118 00:12:37.580 --> 00:12:43.140 that as the previous speaker has mentioned we're sort of we've lost in 119 00:12:43.140 --> 00:12:47.420 our age right that I think before back on the gold standard people really 120 00:12:47.420 --> 00:12:52.740 thought of money as sort of a metric a yardstick or a ruler whereas now people 121 00:12:52.740 --> 00:12:56.140 really don't think that money is anything like it's it's not even real 122 00:12:56.140 --> 00:13:00.660 anymore and just like I don't know if you guys notice this but you don't have 123 00:13:00.660 --> 00:13:05.380 After the bailout, the first TARP went through, and jokes would circulate, like you'd hear 124 00:13:05.380 --> 00:13:09.100 people say, when do I get my bailout? Or people would say like, yeah, I'm not going to pay 125 00:13:09.100 --> 00:13:13.540 my credit cards because I'm going to wait for my TARP. Or there would even be ads on 126 00:13:13.540 --> 00:13:18.940 the radio about, you know, it's come down to crazy eddies where the prices are insane 127 00:13:18.940 --> 00:13:21.900 to get your own bailout. You know, and that kind of like, that was just the marketing. 128 00:13:21.900 --> 00:13:26.300 So it was just sort of like the running joke. And I was talking about bailouts, but I think 129 00:13:26.300 --> 00:13:29.500 it was beyond just the humor. I think it really did influence the way people looked at the 130 00:13:29.500 --> 00:13:34.500 World, and that when you're running your business or just a normal person trying to do financial 131 00:13:34.500 --> 00:13:39.200 planning, I mean, just to see a bunch of guys change the rules in the middle of the game 132 00:13:39.200 --> 00:13:43.340 when they were losing, I mean, I think that really shocked a lot of people and makes them 133 00:13:43.340 --> 00:13:47.940 less confident playing this game going forward. And I think the same thing happens with fiat 134 00:13:47.940 --> 00:13:52.240 money, that when the government can just, or when the Federal Reserve can just create 135 00:13:52.240 --> 00:13:57.780 money out of thin air, you know, quite literally, that that sort of shocks people and they start 136 00:13:57.780 --> 00:14:02.180 behaving differently just because that's a different game now that we're playing 137 00:14:02.180 --> 00:14:05.900 and it's funny i think even members of congress have just slowly started to 138 00:14:05.900 --> 00:14:08.740 realize just how 139 00:14:08.740 --> 00:14:11.860 insane this process is i don't know if this is true but the 140 00:14:11.860 --> 00:14:14.260 the uh... anecdote going around 141 00:14:14.260 --> 00:14:17.420 was that when the uh... when they first bailed out AIG 142 00:14:17.420 --> 00:14:20.700 i think the fed came in and stepped in and advanced to eighty five billion i 143 00:14:20.700 --> 00:14:21.620 believe 144 00:14:21.620 --> 00:14:23.440 and that first injection 145 00:14:23.440 --> 00:14:26.780 and they were Bernanke was in a committee meeting with uh... some 146 00:14:26.780 --> 00:14:32.060 members of the Congress and Barney Frank I think asked Bernanke well do you guys 147 00:14:32.060 --> 00:14:36.620 have 85 billion and I think Bernanke was like what do you mean do we have it you 148 00:14:36.620 --> 00:14:42.180 know and you know and so yeah you guys went into the business where you have to 149 00:14:42.180 --> 00:14:45.460 tax people and take their money and spend it we just create it you know so 150 00:14:45.460 --> 00:14:50.460 So, in terms of professions, you chose poorly. 151 00:14:57.460 --> 00:15:02.460 That's a good crowd for my anti-Bernanke jokes. 152 00:15:02.460 --> 00:15:10.460 So, when it comes to interest rates though, there again, in the Austrian view, if you had a free market 153 00:15:10.460 --> 00:15:17.340 When you had a real sound money system based on gold or some market-chosen commodity, what 154 00:15:17.340 --> 00:15:22.220 the interest rate would do is sort of signal, and I'm dumbing it down a little bit here, 155 00:15:22.220 --> 00:15:27.100 but this is the basic spirit of it, is signaling society's willingness to postpone consumption 156 00:15:27.100 --> 00:15:31.300 or their need to have consumption sooner rather than later. 157 00:15:31.300 --> 00:15:34.860 And so it's not that there's a good interest rate or a bad interest rate. 158 00:15:34.860 --> 00:15:38.220 I mean, the interest rate is what it is based on people's preferences. 159 00:15:38.220 --> 00:15:42.280 and so if people really are impatient then the interest rate should be high and it's 160 00:15:42.280 --> 00:15:47.820 the Fed isn't doing anyone any favors by pushing it down that's just messing up the signal 161 00:15:47.820 --> 00:15:51.780 that's in a sense not allowing people to communicate with each other that's partly what market 162 00:15:51.780 --> 00:15:57.240 prices do is it allows people to communicate so Friedrich Hayek has a famous passage when 163 00:15:57.240 --> 00:16:02.180 he's talking about market prices and how they help people in the economy coordinate with 164 00:16:02.180 --> 00:16:06.360 each other and he says that you know suppose there's a I don't remember the exact example 165 00:16:06.360 --> 00:16:11.280 But there's a tin mine in some other country that collapses, right? 166 00:16:11.280 --> 00:16:18.040 And so for a short period, the supply of tin being brought to market is lower than it normally would be. 167 00:16:18.040 --> 00:16:20.680 And so Hayek says, what happens in a decentralized market? 168 00:16:20.680 --> 00:16:25.440 Of course, the price goes up because the supply gets shifted to the left in the short run. 169 00:16:25.440 --> 00:16:30.000 And then what happens? Every business around the world that uses tin economizes on it. 170 00:16:30.000 --> 00:16:32.440 They cut back on their production because the price went up. 171 00:16:32.440 --> 00:16:37.160 So any business where there's some substitutability, where you can use a little bit less of TIN 172 00:16:37.160 --> 00:16:40.240 and more of some other input, that's what they're going to do. 173 00:16:40.240 --> 00:16:44.840 Not because they want to make sure the world economy allocates resources effectively, but 174 00:16:44.840 --> 00:16:45.840 because they want to make money. 175 00:16:45.840 --> 00:16:49.560 They want to minimize costs and if one of their inputs goes up in price, they cut back 176 00:16:49.560 --> 00:16:50.560 on it. 177 00:16:50.560 --> 00:16:56.940 And so Hayek's point is that what the price mechanism does in that scenario is it transmits 178 00:16:56.940 --> 00:17:01.940 the barest amount of information everyone needs in order to respond to the collapse 179 00:17:01.940 --> 00:17:07.020 of the Ten Mind. The people cutting back on their use of tin in Idaho, they don't even 180 00:17:07.020 --> 00:17:12.220 have to know what happened. It's not that someone needs to tell them, oh, by the way, 181 00:17:12.220 --> 00:17:15.540 the tin mine collapsed and so you guys better use less of it. They don't need to know that. 182 00:17:15.540 --> 00:17:21.860 All they need to know is that the price went up. So that's what interest rates do as well. 183 00:17:21.860 --> 00:17:28.920 But there, what they serve to regulate is, in the Austrian view, is how much the production 184 00:17:28.920 --> 00:17:33.680 Structure is geared towards present consumption versus future consumption. 185 00:17:33.680 --> 00:17:39.860 So in here, the reason Austrians are the only major school of thought to focus on this stuff 186 00:17:39.860 --> 00:17:45.560 has to do with the Austrian approach to what's called capital structure, capital theory, 187 00:17:45.560 --> 00:17:51.640 meaning when the Austrians look at an economy and make a model of it, if you will, they 188 00:17:51.640 --> 00:17:56.400 don't just say, as other schools of thought do, they don't say, okay, well, imagine there's 189 00:17:56.400 --> 00:18:00.240 There's a big bunch of labor and this big glob of capital and then they get mixed together 190 00:18:00.240 --> 00:18:05.960 and produce output and that at best if other schools of thought want to talk about saving 191 00:18:05.960 --> 00:18:11.360 and investment they'll say oh well if society invests more well then next period the glob 192 00:18:11.360 --> 00:18:15.680 of capital increases like this year capital was a hundred and next year it'll be a hundred 193 00:18:15.680 --> 00:18:21.120 and ten and that's the way other schools of thought typically deal with thinking through 194 00:18:21.120 --> 00:18:25.520 issues of capital and savings and investment and interest rates whereas in the Austrian 195 00:18:25.520 --> 00:18:33.520 The Austrian approach, it's a lot more realistic. The detail given to the capital structure is a lot more intense. 196 00:18:33.520 --> 00:18:37.520 And so the Austrians picture there being what's called stages of production. 197 00:18:37.520 --> 00:18:43.520 And there the idea is the furthest stage from consumption is something like mining, 198 00:18:43.520 --> 00:18:50.520 where there's getting the materials from the earth, right, or harvesting raw natural resources. 199 00:18:50.520 --> 00:18:54.520 And then those things will move down the stages of production. 200 00:18:54.520 --> 00:18:58.300 So if you just think about it, like you go into an electronic store and you see a plasma 201 00:18:58.300 --> 00:19:04.640 screen TV, if you went back in time and just looked at the life cycle of that thing, it 202 00:19:04.640 --> 00:19:06.360 probably would be years in the making. 203 00:19:06.360 --> 00:19:10.640 If you just traced it back and looked at all the materials that went into that particular 204 00:19:10.640 --> 00:19:15.860 physical thing on the shelf, you would have to go back years to get the starting point, 205 00:19:15.860 --> 00:19:20.120 if you will, and then trace that forward and see how those materials and resources just 206 00:19:20.120 --> 00:19:26.120 The Austrian view the economic system, if you could see it from space, then you would just see some people on the earth would be taking resources out of the ground, 207 00:19:50.120 --> 00:19:53.360 and giving it to other people and all these things would just go through really 208 00:19:53.360 --> 00:19:57.000 complicated chains of transformation where each person put some more finishing 209 00:19:57.000 --> 00:20:00.480 touches on it before it finally comes out as the finished consumer good and 210 00:20:00.480 --> 00:20:05.800 that those chains of production or transformation could take years. 211 00:20:05.800 --> 00:20:11.640 So what the interest rate helps to coordinate is that whole structure 212 00:20:11.640 --> 00:20:15.440 and it's a very complicated thing and so you see it's not just an issue of 213 00:20:15.440 --> 00:20:18.920 oh gee well if interest rates get pushed too low well then we might get more 214 00:20:18.920 --> 00:20:48.920 or inflation. That's really the one thing, even if a mainstream economist or someone from the Chicago School, for example, if they do criticize the Fed's decision with interest rates, usually all they'll say is, oh, interest rates are too low right now and we're going to get inflation. That's the problem, that they view it merely as interest rates are sort of a governor on total spending. And that's what the Keynesians think of it too, and that's what they want. They're saying right now we're in a recession, people aren't spending 215 00:20:48.920 --> 00:20:59.920 In the Keynesian view, that's what the interest rate does. That's its sole function, is it regulates how much total spending there is. 216 00:20:59.920 --> 00:21:05.920 But again, go back to that oil analogy, you'd be missing out a whole lot of what's going on. 217 00:21:05.920 --> 00:21:11.920 What you thought of the oil price was that regulates how much people spend when they fill up their car. 218 00:21:41.920 --> 00:21:48.040 Market Rate, let's say it's 8% and then people in the economy decide they want to save more 219 00:21:48.040 --> 00:21:52.820 because they want their kid to go to college or something. So what happens is everyone 220 00:21:52.820 --> 00:21:56.660 starts saving more, they spend less on restaurants, they spend less on going to the movie, they 221 00:21:56.660 --> 00:22:00.700 spend less on Ferraris and so forth, so they're saving money and then they put it in the bank 222 00:22:00.700 --> 00:22:05.520 let's say. So in a normal market where prices are correct and they're the market prices, 223 00:22:05.520 --> 00:22:09.800 what happens? All those other industries, they see their revenues fall, the theater 224 00:22:09.800 --> 00:22:39.800 and the restaurant owners, they see their sales plummet and so they cut back. They have to lay off waiters and lay off the guys who rip your ticket at the movie theater and so forth, and the people who make Ferraris, they have to cut back their production, lay off staff and buy fewer resources, and then the banks have more savings come in so they can afford to lower their interest rate that they charge on loans. And then what happens, so long as the people running the colleges know that that demand is going to be there in the future, well then they can afford to borrow 225 00:22:39.800 --> 00:22:49.800 to borrow more at the lower rates and then build more buildings in their campuses and people who want to go get PhDs can afford to borrow money to get student loans and so forth. 226 00:22:49.800 --> 00:22:54.800 And so the idea is it's not that, oh, production fell and now we're in a recession. 227 00:22:54.800 --> 00:22:56.800 No, it's just it gets re-diverted. 228 00:22:56.800 --> 00:23:03.800 Instead of resources going into making dinners and Ferraris and showing more movies around the country, 229 00:23:03.800 --> 00:23:10.800 Those same physical resources and workers get redeployed into making stuff that's not going to yield its fruit until years in the future. 230 00:23:10.800 --> 00:23:16.800 So that's the Austrian view of how interest rates serve to coordinate all that stuff. 231 00:23:16.800 --> 00:23:20.800 So it's a very complicated thing. Of course, I'm boiling it down for you, but that's the basic idea. 232 00:23:20.800 --> 00:23:27.800 And so what happens when the Fed comes along and just pushes interest rates down arbitrarily, that screws all that up. 233 00:23:27.800 --> 00:23:42.800 It makes entrepreneurs start acting as if people had saved more, but there aren't more resources to go around, and so it's a boom period, it seems like there's prosperity because you're getting the same signal as if there's also more capital, but there really isn't. 234 00:23:42.800 --> 00:23:51.200 Alright, so that's the Austrian view on interest rates and that's why I and the previous speakers 235 00:23:51.200 --> 00:23:56.240 as well are so concerned about the future because for the last two years basically we've 236 00:23:56.240 --> 00:24:00.440 been in limbo with interest rates being pushed down to basically zero or certain key interest 237 00:24:00.440 --> 00:24:02.980 rates being pushed down that low. 238 00:24:02.980 --> 00:24:03.980 What does that mean? 239 00:24:03.980 --> 00:24:10.360 The economy has been without a major corrective signal, if you will, without that important 240 00:24:10.360 --> 00:24:40.360 to Regulate how much should we invest, how much funds are there available to be borrowed and in particular certain investment banks and other financial institutions they should have gone under, when they make bad investments as they did during the housing boom that caused real physical resources to go to the wrong places, so it really was the case that too many houses were built, that it really was the case too many smart people who maybe should have gone into theoretical physics ended up going into options trades, 241 00:24:40.360 --> 00:25:10.360 Society lost opportunities. Society right now would have been on a much more solid footing had those mistakes not been made during the boom and so the point is you can't just undo that. You can't just take a mulligan by having Bernanke buy everyone's toxic assets and say, okay, okay, let's try it again. The mistakes were made. You can't just turn all those houses now into virgin pieces of wood again and then use them for something else. 242 00:25:10.360 --> 00:25:40.360 I mean those mistakes have been made and we now have to suffer the losses. So the point is those losses did happen, someone has to bear them and when the Fed comes in and just buys up all these toxic assets or does other tricks to sort of rescue the banks, it didn't undo the mistakes, it just meant now the people who made those mistakes don't have to eat the loss and it's going to be spread now among everyone else who holds dollar bills. 243 00:25:40.360 --> 00:25:45.360 Price Inflation 244 00:26:10.360 --> 00:26:18.360 The banks legally speaking have the right to advance new loans, but they're not for various reasons. 245 00:26:18.360 --> 00:26:25.360 There's this tendency to think that money really hasn't gotten into the economy yet, but in a sense it has. 246 00:26:25.360 --> 00:26:31.360 Those banks who sold assets in exchange for checks written from Bernanke, that was real money to them. 247 00:26:31.360 --> 00:26:36.360 Those dollars are just as much legal tender as a $10 bill in your pocket. 248 00:26:36.360 --> 00:27:06.360 and so that money really has been created but what so when you talk about well so what are the distortions so far everything seems fine well the distortion is prices first of all should have been collapsing that that's normally what happens when there is a boom and then a bust is prices come down and so what like when it comes to the stock market or the housing market I think the conventional wisdom is things were going great and then the market got crazy and crashed and now finally we're pushing you know we're allowing it to recover to where it should be 249 00:27:06.360 --> 00:27:12.360 In the Austrian view, it's no, things were crazy. You got prices pushed way up here in the stock and real estate markets. 250 00:27:12.360 --> 00:27:17.360 Then people realized the mistakes and prices started to come down back to a more sane level. 251 00:27:17.360 --> 00:27:22.360 And then Bernanke and the federal government came in and then did their best to inflate it back up. 252 00:27:22.360 --> 00:27:25.360 And now they're doing their best to keep them up at these crazy levels. 253 00:27:25.360 --> 00:27:31.360 And so that's partly why a bunch of us think that another crash is coming in asset prices. 254 00:27:31.360 --> 00:27:38.360 And so that's part of it, that the inflation in a sense is already there, it's just the baseline would have been much lower prices. 255 00:27:38.360 --> 00:27:42.360 So we already have seen a re-inflation of the asset bubble. 256 00:27:42.360 --> 00:27:50.360 But then again, as far as the prices of things in the grocery store and so forth, I personally do think that that's coming. 257 00:27:50.360 --> 00:27:57.360 And that's why so many of us are telling people, you know, buy gold and silver and things that are going to at least allow you to get through this. 258 00:27:57.360 --> 00:28:03.600 Not that we're going to be able to avert the coming crash, but at least if enough of us survive, 259 00:28:03.600 --> 00:28:09.000 sort of a Darwinian sense, then when we emerge from it, the Austrians will be the only ones left standing. 260 00:28:09.000 --> 00:28:13.500 Us and Ben Bernanke. So I'll stop it there. Thanks a lot.