WEBVTT NOTE Problems in Cycle Theory 1 00:00:00.000 --> 00:00:11.800 So the subject of my lecture is problems in Austrian business cycle theory and it's slightly 2 00:00:11.800 --> 00:00:17.320 ambiguous because what I mean by this problem is in two senses, problem is that the Austrian 3 00:00:17.320 --> 00:00:22.080 business cycle theory deals with and then problems of the Austrian business cycle theory. 4 00:00:22.080 --> 00:00:27.920 Since I count myself as an Austrian economist, it's of course true that not all Austrian 5 00:00:27.920 --> 00:00:35.200 theories are problematic, only some of them are, but we'll start with the 6 00:00:35.200 --> 00:00:40.280 problem that Austrian business cycle theory is to deal with and as always in 7 00:00:40.280 --> 00:00:46.720 economics there are certain phenomena that we want to deal with and the 8 00:00:46.720 --> 00:00:53.000 phenomenon that we deal with in macroeconomics are one of the phenomena 9 00:00:53.000 --> 00:00:57.400 that we deal with is the evolution of the economy. 10 00:00:57.400 --> 00:01:00.000 Let's say here, I put on my macroeconomic hat 11 00:01:00.000 --> 00:01:03.300 and we have here the evolution of GDP, 12 00:01:03.300 --> 00:01:05.200 let's say in the course of time, 13 00:01:05.200 --> 00:01:09.660 and we see these observed data, of course, 14 00:01:09.660 --> 00:01:11.560 if you look at the actual statistics, 15 00:01:11.560 --> 00:01:14.160 it never looks like that night, 16 00:01:14.160 --> 00:01:17.080 it swings absolute, in fact, much more, 17 00:01:17.080 --> 00:01:19.340 but I'll neglect this here 18 00:01:19.340 --> 00:01:23.860 and take this idealized, snaky curve. 19 00:01:25.180 --> 00:01:30.180 And what we know of course, for theoretical reason, 20 00:01:30.260 --> 00:01:33.820 is that this curve is the resultant effect 21 00:01:33.820 --> 00:01:37.460 of several causes that operate independently of one another 22 00:01:37.460 --> 00:01:42.060 and compose to produce this effect. 23 00:01:42.060 --> 00:01:47.060 And now the question is, how do we interpret this here? 24 00:01:47.060 --> 00:01:52.060 So how do we interpret this here? What are these different causes that come into play? 25 00:01:52.060 --> 00:01:58.060 I will just talk about two fundamentally different approaches. 26 00:01:58.060 --> 00:02:06.060 According to one approach, we interpret this entire evolution as resulting from an equilibrium process. 27 00:02:06.060 --> 00:02:13.060 And in the other approach, we reckon that both equilibrium forces are the same, 28 00:02:13.060 --> 00:02:20.340 come into play, but there's also a disequilibrium component, so that at least in part the observed 29 00:02:20.340 --> 00:02:24.500 data result from disequilibrium. 30 00:02:24.500 --> 00:02:31.940 Now the problem with the equilibrium interpretation is the following. 31 00:02:31.940 --> 00:02:38.700 We have, let's say, such cases here, let's say we have something, let's say we have a 32 00:02:38.700 --> 00:02:49.500 Trothier, somewhere in between, let's say in 1929, and there's something like this, and then it goes on like this. 33 00:02:49.500 --> 00:02:57.100 So we have this phenomenon here, so how do we make sense out of this in terms of equilibrium, of an equilibrium interpretation? 34 00:02:57.100 --> 00:03:07.300 Well, we would have to say that all of this was planned, or that it resulted, for example, from cyclical movements or seasonal movements that we have in the economy. 35 00:03:07.300 --> 00:03:24.300 So at this point, GDP decreased, nominal GDP decreased very dramatically, but all of this was planned, people were anticipating it and in fact there's also no such thing as unemployment, people just left the factories and so on, hang out a little bit at home. 36 00:03:24.300 --> 00:03:32.300 Some people are starving, but that's not really starving, it's kind of a radical diet. 37 00:03:32.300 --> 00:03:50.300 All right, so that would be the coherent equilibrium interpretation of a general equilibrium theorist who says, well, all of the data that we observe are always resulting from a perfect equilibrium process would have to hold such an interpretation. 38 00:03:50.300 --> 00:03:55.300 But of course, we do not need to pursue this in any more detail since it is fatally absurd. 39 00:03:55.300 --> 00:04:08.300 I think from our own experiences we know that we constantly make errors and often things happen that we did not anticipate and often things did not turn out the way we wished them to turn out. 40 00:04:08.300 --> 00:04:21.300 Now, in all these cases then we have this equilibrium component, something happens that was not planned the way it turned out to be. 41 00:04:21.300 --> 00:04:26.300 And so we have the observed phenomena, observed data, 42 00:04:27.260 --> 00:04:32.260 resulting from both actions that produce the results 43 00:04:32.460 --> 00:04:34.140 that they were meant to produce 44 00:04:34.140 --> 00:04:36.540 and actions that did not produce the results 45 00:04:36.540 --> 00:04:37.700 that were meant to produce. 46 00:04:37.700 --> 00:04:40.420 So we have something like water plants, 47 00:04:40.420 --> 00:04:43.340 there are bankruptcies, unemployment, 48 00:04:43.340 --> 00:04:45.380 there are factories that are not used anymore, 49 00:04:45.380 --> 00:04:50.220 that's sent idle and so on. 50 00:04:50.220 --> 00:04:55.220 In other words, what we have in such cases as 1929 51 00:04:55.900 --> 00:04:58.100 and other historical situations 52 00:04:58.100 --> 00:05:01.580 is a situation of clusters of errors, right? 53 00:05:05.700 --> 00:05:08.420 Clusters of errors. 54 00:05:09.700 --> 00:05:12.420 No need to admire my handwriting. 55 00:05:14.660 --> 00:05:19.660 So many entrepreneurs, many market participants, 56 00:05:19.660 --> 00:05:49.660 at more or less the same time and the problem that we face in cycle theory is to explain this or in a crisis theory is to explain this and as Professor Garrison and others pointed out that Professor Garrison in particular in his lecture, well what the Austrian theory does is to provide an explanation of these classes of errors. It's an explanation of how it comes to the crisis. So what does the Austrian theory 57 00:05:49.660 --> 00:06:15.660 So what I can do, I can be brief here, since we already, since you've been introduced this already, so what the Austrian theory says is, well, there is such a thing as a ranking of investment projects, right? 58 00:06:15.660 --> 00:06:22.160 These are more or less important. Of course, there is some subjectivism involved. It depends from individual to individual. 59 00:06:22.160 --> 00:06:32.660 But let's say if I abstract from all these individual differences, I would say, okay, by and large, what is most important for each individual is to stay alive. 60 00:06:32.660 --> 00:06:38.660 So food, certain marginal quantities of food tend to be pretty high. 61 00:06:38.660 --> 00:06:46.340 and then comes protection, something like this, so physical security and then clothing, housing and so on, 62 00:06:46.340 --> 00:06:55.780 always in terms of marginal units, that is after the first elementary unit of housing, then you get better, additional quantities of better food and so on, right? 63 00:06:55.780 --> 00:07:04.820 So in any case all these things have different importances and the question is, since we have a given amount of resources at our disposition, 64 00:07:04.820 --> 00:07:25.820 We cannot do all the things that we want to do, since I'm a great lover of gold, for example, I would like to drive a golden car, I would like to have a chauffeur, many other things, ultimately I'm not very materialistically oriented person, so golden car would be sufficient probably. 65 00:07:25.820 --> 00:07:33.020 and so the question is we have to cut short our resources are limited and at 66 00:07:33.020 --> 00:07:36.380 some point we have to draw the line they'll say all these things we use our 67 00:07:36.380 --> 00:07:40.900 resources to attain all these things and we renounce to these other things now 68 00:07:40.900 --> 00:07:45.220 that holds true both at the individual level and at the level of society at the 69 00:07:45.220 --> 00:07:51.220 level of society in the market economy the line is drawn by the market process 70 00:07:51.220 --> 00:08:07.220 Entrepreneurs compete on the market for factors of production and they buy these factors of production, use them for projects that aim at the satisfaction of consumer desires. 71 00:08:07.220 --> 00:08:16.220 The whole pricing, as Professor Salerno has explained, at least I hope he has explained it, 72 00:08:16.220 --> 00:08:28.220 It starts from the prices that consumers are supposedly ready to pay for the consumer's goods that we as entrepreneurs will offer them. 73 00:08:28.220 --> 00:08:38.220 And in the light of this estimate, in the light of what we believe consumers will pay for the factors of production, we go to the factor markets and buy factors of production. 74 00:08:38.220 --> 00:08:46.220 And in this buying process, for factors of production, we are in competition with other entrepreneurs who also want to make money. 75 00:08:46.220 --> 00:08:50.220 That prevents prices of useful resources from falling to zero. 76 00:08:50.220 --> 00:09:01.220 In particular, that prevents wages from ever falling to zero because labor, human labor, is the one ingredient that we need for all production processes. 77 00:09:01.220 --> 00:09:14.220 And as a consequence of this entrepreneurial market process, all resources, all factors of production that we have at our disposition are used and brought into play. 78 00:09:14.220 --> 00:09:36.220 Now, entrepreneurs in a market economy buy the factors of production with money and part of the money that they use or these buying activities in this market process is provided through the credit market, through the credit process. 79 00:09:36.220 --> 00:09:42.220 Now, the following thing can happen if you have, for example, a fractional reserve banking system. 80 00:09:42.220 --> 00:09:49.220 The banks have some leeway to increase the quantity of money substitutes. 81 00:09:49.220 --> 00:09:57.220 For example, they can give you a credit line, provide you with a deposit account out of nothing. 82 00:09:57.220 --> 00:09:59.220 It does not come out of savings. 83 00:09:59.220 --> 00:10:05.220 In this case, then you have additional quantities of money substitutes at your disposition. 84 00:10:05.220 --> 00:10:13.220 In this position, the entrepreneur who gets them can appear with these money substitutes on the factor markets and by factors of production. 85 00:10:14.220 --> 00:10:26.220 Now what the Austrian theory says is, if the entrepreneurs do not anticipate the consequences that the higher quantity of money will have on prices, what will be the consequence? 86 00:10:26.220 --> 00:10:34.220 and if the quantity of money increases, prices will increase, sooner or later in the future prices will increase. 87 00:10:34.220 --> 00:10:38.220 So what will happen in particular, the prices of consumer goods will increase. 88 00:10:38.220 --> 00:10:44.220 So if we had an equilibrium process, what would happen is that the entrepreneurs would say, 89 00:10:44.220 --> 00:10:53.220 okay, there is inflation going on, as a consequence the prices of consumer goods in the future will be higher than they would have been otherwise. 90 00:10:53.220 --> 00:11:00.700 and so we can offer higher prices for factors of production. I always think 91 00:11:00.700 --> 00:11:03.900 that they are in competition with the other entrepreneurs. So their interest is 92 00:11:03.900 --> 00:11:10.820 to bid as high as possible, as low as possible, but if necessary higher in any 93 00:11:10.820 --> 00:11:14.460 case than the other entrepreneurs in order to make themselves the buck rather 94 00:11:14.460 --> 00:11:19.380 than let the other entrepreneurs do it. So they bid up factor prices and that's 95 00:11:19.380 --> 00:11:27.880 If we have an equilibrium process, nothing will change, that is, we will have some redistribution, I cannot go into detail talking about this, 96 00:11:27.880 --> 00:11:36.780 will be some redistribution, other projects will be pursued, etc., but by and large, the line would remain at the same level as before, 97 00:11:36.780 --> 00:11:41.640 and all that would happen is that the whole process takes place at a higher level of prices. 98 00:11:41.640 --> 00:11:48.220 Factors of production are bought at higher prices, but the products are sold also at higher prices. 99 00:11:48.220 --> 00:12:11.500 Now what the Austrian business cycle theory said is, if entrepreneurs do not anticipate this, then entrepreneurs will now, in their calculus, perceive some investment project as being feasible, as being profitable, that would not have been, appear to be profitable otherwise. 100 00:12:11.500 --> 00:12:20.500 So the additional quantity of money is not offered on the credit market, the interest rate is lower than it would otherwise have been. 101 00:12:20.500 --> 00:12:38.500 So there's the quantity of credit, so we have a shift of the supply curve, and as a consequence the interest rate is lower than it otherwise would have been. 102 00:12:38.500 --> 00:12:43.500 Now, in the entrepreneurial calculus, certain projects appear to be profitable. 103 00:12:43.500 --> 00:12:52.500 That is, let's say number 6 and 7 also appear to be profitable and thus feasible, but they are really not. 104 00:12:52.500 --> 00:12:54.500 Why are they not? 105 00:12:54.500 --> 00:13:00.500 Well, because it is still so that the quantity of real resources that we use in the investment project has not increased. 106 00:13:00.500 --> 00:13:04.500 All that has increased is the quantity of money. 107 00:13:04.500 --> 00:13:07.500 So in fact, what we have in such a situation is the error. 108 00:13:07.500 --> 00:13:20.500 The error is inherent in the situation from the very outset, from the very moment the entrepreneur set out to start additional investment projects that cannot be all realized. 109 00:13:20.500 --> 00:13:32.500 Now notice that it's not a central point, but notice that, of course, this is a simplified account of the whole situation. 110 00:13:32.500 --> 00:13:39.500 This is not necessarily the case that in the later busts then, the project six and seven will be abandoned. 111 00:13:39.500 --> 00:13:43.500 Think of the example that Professor Garrison has given. 112 00:13:43.500 --> 00:13:49.500 You have the house builder, five houses could be built in equilibrium. 113 00:13:49.500 --> 00:13:59.500 And then we suddenly start trying to build seven houses and then we go for a while until we discover that with what is rest then of the brick material, 114 00:13:59.500 --> 00:14:29.500 does not mean that then finally we'll choose to realize what is here what would in a normal situation equilibrium situation have been number one two three four it might very well be the case that we decide to complete the houses number one two six seven could also be so there's no necessity there the point is we cannot do all these things because our physical resources are limited 115 00:14:29.500 --> 00:14:42.500 Okay, now, what take does this theory give us on the data, on the interpretation of the data? 116 00:14:42.500 --> 00:15:12.500 Okay, let me go back to my diagram. 117 00:15:12.500 --> 00:15:19.500 This is what we observe in the real world, that's the actual factual record that we observe. 118 00:15:19.500 --> 00:15:40.500 And so there are these discontinuities at this point here, at this point, and here, and here, and here. 119 00:15:40.500 --> 00:16:00.500 Now that's the real record, and here we have, thank you, so that you can all enjoy this, okay. 120 00:16:00.500 --> 00:16:07.500 So this is nominal GDP, this is real GDP. 121 00:16:07.500 --> 00:16:11.500 In nominal GDP, we have the following situation. 122 00:16:27.500 --> 00:16:29.500 Okay, something like this. 123 00:16:29.500 --> 00:16:31.500 And now these dots are connected. 124 00:16:37.500 --> 00:16:47.500 So this is in fact the record that we observed that is a calculated record because it's assumed to be real data. 125 00:16:47.500 --> 00:16:54.500 So we have here our nice business, stylized business cycle in GDP. So what does this mean? 126 00:16:54.500 --> 00:17:05.500 Here the quantity of money increases and it's not anticipated. So people start investing in resources, in projects that cannot be completed. 127 00:17:05.500 --> 00:17:12.300 that would not have been chosen if we had not mass error on the side of entrepreneurs. 128 00:17:12.300 --> 00:17:21.980 What that means is that economic growth is smaller than it would otherwise have been. 129 00:17:21.980 --> 00:17:29.180 We would have had this growth curve, in fact, but we are on this one. 130 00:17:29.180 --> 00:17:34.460 So you see, if we just look at the data we observe, well, in real terms, 131 00:17:34.460 --> 00:17:42.960 The data that we get from the statistical bureau and so on, actually might show a small increase in economic growth. 132 00:17:42.960 --> 00:17:44.960 Well, that's not the relevant consideration. 133 00:17:44.960 --> 00:17:49.960 The relevant consideration is, could our growth have been higher than that? 134 00:17:49.960 --> 00:17:56.960 And it would have been much higher, had it not been for the wasting of resources, for the misallocation of resources, 135 00:17:56.960 --> 00:17:59.960 due to the influx of the additional money quantities. 136 00:17:59.960 --> 00:18:05.680 okay so growth would have here been higher but it is lower as a consequence 137 00:18:05.680 --> 00:18:10.400 of the misallocation of resources now comes to bust right now comes to bust at 138 00:18:10.400 --> 00:18:15.280 one point entrepreneurs realize huh right we cannot go on as before it's 139 00:18:15.280 --> 00:18:20.640 impossible to complete all these projects that we have started so we've 140 00:18:20.640 --> 00:18:25.480 got to cut short somewhere draw the line anew right think of the house example 141 00:18:25.480 --> 00:18:55.480 So again, in the equilibrium process, we could have built five houses, now we started out to build six, and at that point we realized, well that's not possible to complete all the six, we go on with four, and in fact we complete four, so now, in fact, in the bust phase then, the GDP declines, nominal GDP declines, the entrepreneurs realize what's going on, and they now decide to do 142 00:18:55.480 --> 00:18:58.920 with the resources what can be done with the resources that is they put them to 143 00:18:58.920 --> 00:19:04.400 the most effective use under given circumstances and here then we have real 144 00:19:04.400 --> 00:19:10.000 economic growth again right the bus phase here I've assumed also idealized 145 00:19:10.000 --> 00:19:13.960 that the bus phase is short could be a couple of weeks or a few months and then 146 00:19:13.960 --> 00:19:19.160 it goes on so we have real growth here in this phase and we again on a on the 147 00:19:19.160 --> 00:19:49.160 growth path until, what happens again, SIN sets in, the central bank increases the quantity of money or something like this, right, and again our entrepreneurs don't realize what's going on, they think that everything is good and fine, they set out for all these new investment projects, so again they are really misallocating resources, right, here it looks like a boom, prices rise, income rises, people go on a vacation, having nice 148 00:19:49.160 --> 00:19:53.880 and five-star restaurants and so on but in fact there as Mises said well they 149 00:19:53.880 --> 00:19:57.840 are burning the furniture and think they have found a great technique for 150 00:19:57.840 --> 00:20:04.120 heating. So this would have could have been our growth path but that is 151 00:20:04.120 --> 00:20:10.120 actually what we get so we impoverish ourselves relative to what we could 152 00:20:10.120 --> 00:20:15.040 have had and again so that's all of course a very nice scenario that I give 153 00:20:15.040 --> 00:20:45.040 here there are situations and historically many in many cases such situations have existed where you have absolute decline right so here it's a kind of a nice story and I put on this story because it's important to keep in mind that we are talking here about relative about a comparative consideration right it's not because we observe in the higher economic real economic growth rate that everything is in order the problem still persists we are in poverty 154 00:20:45.040 --> 00:20:51.640 impoverishing ourselves relative to what we could have attained and again at some 155 00:20:51.640 --> 00:20:56.200 point entrepreneurs realize what's going on there is a bust and how does this 156 00:20:56.200 --> 00:21:01.800 bust manifest itself well for example by a by a run on the on the fractional 157 00:21:01.800 --> 00:21:08.080 reserve banks by a deflationary process as it has been described by Irving 158 00:21:08.080 --> 00:21:14.200 Fischer and others and so on right and then again the bust is actually the 159 00:21:14.200 --> 00:21:16.200 So, the point of time... 160 00:21:44.200 --> 00:22:12.200 You see, I'm still far away from being a great artist, but I'm trying my best though. 161 00:22:12.200 --> 00:22:26.200 In any case you get the point. So here again the growth rate could have been higher and it remains lower than it would have been possible. 162 00:22:26.200 --> 00:22:41.200 So that's what the Austrian theory says. The further you get away from, you proceed in time, the lower is of course the growth rate that is at each point accessible to you. 163 00:22:41.200 --> 00:22:46.400 and accessible to you compared to what would have been accessible if we hadn't engaged 164 00:22:46.400 --> 00:22:53.440 in this knowledge from the very first place, so you can imagine what kind of real wealth 165 00:22:53.440 --> 00:23:01.400 our Western societies could have had if the Bank of England in 1844 had not obtained the 166 00:23:01.400 --> 00:23:05.560 monopoly of being the central bank of England, if in the United States the Federal Reserve 167 00:23:05.560 --> 00:23:10.000 system had not been established in 1913 and so on, or if we had not started fractional 168 00:23:10.000 --> 00:23:15.000 I would be pretty high up here, and we are there in fact. 169 00:23:15.000 --> 00:23:25.000 Capitalism has run an amok, as the leftists say, in the status in particular, only for a very short period of time. 170 00:23:25.000 --> 00:23:33.000 By and large, it coincided with the time of the, what we call the classical gold standard, 171 00:23:33.000 --> 00:23:41.000 which came into existence during the 1870s and then lasted, roughly speaking, until World War I. 172 00:23:41.000 --> 00:23:47.000 So there you had wild west capitalism and what you had, in fact, were enormous growth rates. 173 00:23:47.000 --> 00:23:57.000 That's the kind of story, if you just let it go on, that's the kind of thing that brings you very high up on a growth path. 174 00:23:57.000 --> 00:24:07.000 We instead have chosen to establish all these institutions, which are the institutional equivalent of stabbing oneself in the leg. 175 00:24:07.000 --> 00:24:12.000 Then go on and you think, oh, this is a great feeling, it's kind of a massage. 176 00:24:12.000 --> 00:24:21.000 And suddenly you look down, oh, there's this knife here, and then you take it out and it goes for a while and then you say, oh, again. 177 00:24:21.000 --> 00:24:24.000 So that's the Austrian story. 178 00:24:24.000 --> 00:24:35.000 So the important thing is again, this year we call this boom, and Professor Garrison has said, well it's actually an unsustainable period of growth. 179 00:24:35.000 --> 00:24:44.000 I feel uncomfortable about calling it growth at all, because we have to distinguish between unsustainable growth and real growth. 180 00:24:44.000 --> 00:24:51.000 For me growth is a little bit like being pregnant, either you are pregnant or you are not. 181 00:24:51.000 --> 00:24:57.000 and you're not unsustainably pregnant or pregnant, you are pregnant or not, so there is growth or not. 182 00:24:57.000 --> 00:25:05.000 This is not a period of growth, it is a period of absolute impoverishment, which is somehow concealed by the fact that 183 00:25:05.000 --> 00:25:16.000 due to the redistribution process that comes into being as the quantity of money is increased, the whole thing is somewhat concealed, some people in fact do get better off. 184 00:25:16.000 --> 00:25:27.000 Okay, so the boom is a misnomer, right? It's a period of illusion. It's a period during which we believe we are better off than we really are. 185 00:25:31.000 --> 00:25:43.000 Yeah, so now what's the problem in this scenario? Now turning to the problems of Austrian business, problems with Austrian business cycle theory. 186 00:25:43.000 --> 00:25:56.000 Well, one problem is that the theory, in the way Mises formulated it and Hayek developed it further on, was a little bit too mechanistic. 187 00:25:56.000 --> 00:26:00.000 It boiled down to an explanation of how error came about. 188 00:26:00.000 --> 00:26:08.000 So the claim was somehow that by increasing the quantity of money, we there, it's a factor, reduce the interest rate below the equilibrium interest rate. 189 00:26:08.000 --> 00:26:34.000 So again, let me draw this one diagram. We have here money and interest rate, shift of the supply curve, the influx of additional money, and then as of necessity, we get a lower interest rate. 190 00:26:34.000 --> 00:26:48.720 Now this, ladies and gentlemen, is not true, is not necessarily true, that an increase 191 00:26:48.720 --> 00:26:55.560 in the quantity of money, if so facto, leads to a decrease in the interest rate, that depends 192 00:26:55.560 --> 00:26:58.820 again on the expectations of the market participants. 193 00:26:58.820 --> 00:27:03.640 If entrepreneurs realize what's going on, if they know that the money that is offered 194 00:27:03.640 --> 00:27:10.200 on the credit market comes from an increase of the quantity of money. Alan Greenspan spent 195 00:27:10.200 --> 00:27:18.200 an extra night shift at the printing press. Next morning he pops up at the stock exchange 196 00:27:18.200 --> 00:27:22.240 or wherever else and then he offers all these new tickets. Well, the entrepreneurs know, 197 00:27:22.240 --> 00:27:28.540 oh, yes, Alan, well, he has had a hard night, the eyes are a little thin and so, yeah, they 198 00:27:28.540 --> 00:27:32.240 know what's going on. Okay, all right, so he's offering all this quantity of money now 199 00:27:32.240 --> 00:27:37.240 Now on the market, it will increase money prices below the level we would have expected otherwise. 200 00:27:37.240 --> 00:27:41.240 So what they will do, they will bid up interest rates. 201 00:27:41.240 --> 00:27:47.240 And because they can count on higher selling prices for their production processes in the future. 202 00:27:47.240 --> 00:27:53.240 What that means then is that also the demand curve shifts, right? 203 00:27:53.240 --> 00:28:00.240 And the interest rate will in any case be higher than it would otherwise have been. 204 00:28:00.240 --> 00:28:04.240 It might be, of course, there are various difficulties here, too, while guessing what is the right interest rate. 205 00:28:04.240 --> 00:28:10.240 It might be lower, but it might actually also be higher than the interest rate that would otherwise have come into existence. 206 00:28:10.240 --> 00:28:22.240 So there's no systematic reason to assume that in this scenario the interest rate will of necessity drop only because the quantity of money has increased. 207 00:28:22.240 --> 00:28:33.240 So, demand, the demand curve, the fundamental point is the demand curve and the supply curve are not necessarily independent of one another. 208 00:28:33.240 --> 00:28:40.240 In the case of most other goods, we can assume this with a good degree of confidence. 209 00:28:40.240 --> 00:28:51.240 In the case of money, this is much more problematic and actually we always refuse to believe this when we have a situation of hyperinflation, for example. 210 00:28:51.240 --> 00:28:59.240 What happens in a hyperinflation? Well, at the latest then, the market participants know that the purchasing power of money will decrease ever more. 211 00:28:59.240 --> 00:29:07.240 As a consequence, they will have a higher nominal demand for money. So they overcompensate. 212 00:29:07.240 --> 00:29:14.240 What you then observe in such a situation is that interest rates go up. We call this the price premium and so on. 213 00:29:14.240 --> 00:29:21.240 That's exactly the scenario that I have illustrated in this case. 214 00:29:21.240 --> 00:29:29.240 So again, the point is the story that Mises has offered, 215 00:29:29.240 --> 00:29:34.240 which Hayek has developed, is a little bit too mechanistic. 216 00:29:34.240 --> 00:29:42.240 It's not a theory of error, therefore it is not ultimately a theory of an explanation of the business cycle. 217 00:29:42.240 --> 00:29:49.800 and it does not explain really why it comes to the cluster of errors it starts 218 00:29:49.800 --> 00:29:56.760 from the assumption well and in this scenario people will not anticipate I 219 00:29:56.760 --> 00:30:01.360 will not realize what's going on but that is of course a petition of the 220 00:30:01.360 --> 00:30:05.840 principle and you assume to be true but would have to be explained in the first 221 00:30:05.840 --> 00:30:34.840 So, what's the way out? What can we do instead? We can pursue what I've called an essentialist approach, and rather than pursuing the question, what are the consequences of events in the material world on the quality of decision making of the entrepreneurs? 222 00:30:34.840 --> 00:30:40.680 of the entrepreneurs. We can raise the question, what are the institutions that are inherently 223 00:30:42.040 --> 00:30:49.240 inviolable and which error is so to say embedded? And I think there are such institutions 224 00:30:50.840 --> 00:30:57.240 which might then serve as our examples in the following discussion. The first one is fractional 225 00:30:57.240 --> 00:31:05.140 Fractional Reserve Banking, FRB. I will not go into much detail here because I have another 226 00:31:05.140 --> 00:31:11.000 lecture to give on this subject. But the point is what we do in fractional reserve banking 227 00:31:11.000 --> 00:31:17.520 is as I have explained the banker lends out a certain quantity of money tickets, money 228 00:31:17.520 --> 00:31:23.640 substitutes, not necessarily a form of bank notes but can also be bank deposits, which 229 00:31:23.640 --> 00:31:28.640 which are backed up by a smaller or much smaller reserve of money. 230 00:31:28.640 --> 00:31:39.640 So, for illustration purposes we can assume a reserve ratio of 1 to 10 and we illustrate this whole thing by an inverted pyramid. 231 00:31:39.640 --> 00:31:44.640 Now, where is the illusion, where is the inherent error in such a situation? 232 00:31:44.640 --> 00:31:52.640 Now the error is that the market participants believe they can rely at any moment on the use of 10 ounces of gold 233 00:32:01.640 --> 00:32:12.640 because they have tickets giving claim to 100 ounces of gold 234 00:32:14.640 --> 00:32:22.140 And it is of course clear that not all of them can have, can redeem their ticket into real gold at the same time, right? 235 00:32:22.140 --> 00:32:29.140 The whole thing is possible only because only a part of the market participant chooses at any instance to do this. 236 00:32:29.140 --> 00:32:39.140 So what we here have then is a dissociation of the beliefs of the market participants, the belief they can rely on 100 ounces of gold, right? 237 00:32:39.140 --> 00:32:46.140 In the aggregate, this belief informs their plan making, it therefore determines their behavior. 238 00:32:46.140 --> 00:32:58.140 The marginal utility of money, marginal value of money for each of these bank customers is lower than it would have been if the bank had not issued these tickets. 239 00:32:58.140 --> 00:33:08.140 The additional quantity of money is lower than the marginal value of each unit of money, therefore they tend to spend more of this money, therefore prices are higher than they would otherwise have been. 240 00:33:08.140 --> 00:33:14.140 Therefore the redistribution within society or the market process is different from what it would have been. 241 00:33:14.140 --> 00:33:24.140 So this whole business has a real impact on the market and it is in one important respect based on an illusion. 242 00:33:24.140 --> 00:33:35.140 Illusion that each of them has to be able to rely on the ownership of the aggregate, 100 ounces of gold whereas there are only really 10 ounces of gold there. 243 00:33:35.140 --> 00:33:56.140 Well, we know for fairly certain reasons that it must with great regularity come to awareness of this error and the point of time when it comes to awareness of this error of this illusion is the time of the bank run. 244 00:33:56.140 --> 00:34:03.140 For what happens in a bank run? Well, people say, oh, I might not get the money that my ticket gives me claim to. 245 00:34:03.140 --> 00:34:09.140 So they rush up and try to be first in line, because otherwise they might not get their money. 246 00:34:09.140 --> 00:34:14.140 And at that point then, the tickets become valueless. They're no more accepted, 247 00:34:14.140 --> 00:34:21.140 because there's no more confidence among the market participants that they can in fact be redeemed against gold. 248 00:34:21.140 --> 00:34:37.140 So, fractional reserve banking leads to this kind of cyclical movement without any consideration for inter-temporal misallocation of resources. 249 00:34:37.140 --> 00:34:46.140 We don't even have to go into the Austrian story, Mises and Hayek, Rothbard and so on, in order to arise such a movement. 250 00:34:46.140 --> 00:34:53.780 and Nominal GDP over time, and it increases because the quantity of money tickets increases, 251 00:34:53.780 --> 00:34:59.180 thus popping up the price level, and thus GDP in the course of time. 252 00:34:59.180 --> 00:35:05.980 And then here we have the bank run, and thus a great part of the quantity of money becomes 253 00:35:05.980 --> 00:35:12.420 valueless, namely all the money substitutes, quantity of money shrinks, nominal GDP shrinks, 254 00:35:12.420 --> 00:35:14.580 adaption phase, and then it goes on again 255 00:35:14.580 --> 00:35:19.580 when the banks again start issuing fractional reserve 256 00:35:19.580 --> 00:35:21.860 tickets, and that is by and large the pattern 257 00:35:21.860 --> 00:35:24.940 that we observed during several decades in the 19th century 258 00:35:24.940 --> 00:35:29.980 and when we did not have central banking. 259 00:35:32.680 --> 00:35:33.520 Okay. 260 00:35:37.020 --> 00:35:42.020 What we, what is the impact of the impact 261 00:35:42.420 --> 00:35:46.420 The Institution of Central Bank and of Fiat Money on the cyclical pattern 262 00:35:46.420 --> 00:35:50.420 Well, it's roughly speaking, it's the following 263 00:35:50.420 --> 00:35:54.420 Let's say we have here the 19th century until 1913 264 00:35:54.420 --> 00:35:58.420 Now I'm talking about the US, right? Again, that's a simplified 265 00:35:58.420 --> 00:36:02.420 version of events, right? So we have this pattern 266 00:36:02.420 --> 00:36:06.420 Okay, and now here we have 267 00:36:06.420 --> 00:36:10.420 the establishment of the Federal Reserve. What happens 268 00:36:10.420 --> 00:36:31.420 So, what is due to the existence of the Federal Reserve? Well, we have a central bank, as we have pooling of our reserves, pooling of the money hoards, which allows the central institution to bail out individual banks that otherwise would have gone into bankruptcy, if they had relied only on themselves. 269 00:36:31.420 --> 00:36:36.720 So, what we get is an extension of the cycle and it becomes more violent, right? 270 00:36:36.720 --> 00:36:43.420 So the phases become longer, but also more violent, okay? 271 00:36:45.420 --> 00:37:00.220 Now, that is, so that would be, let's say, 1922, and that would be 1929. 272 00:37:01.420 --> 00:37:14.420 And then we have this long upswing, because what happened in 1944, well we have the establishment of an international central bank. 273 00:37:14.420 --> 00:37:18.420 The Federal Reserve became an international central bank. 274 00:37:18.420 --> 00:37:28.420 So we have reserves streaming in from other countries and you have no more exchange rate volatility which contributes to this scenario. 275 00:37:28.420 --> 00:37:32.420 so you have a very, very, very, very, very long upswing 276 00:37:32.420 --> 00:37:37.420 and it would have led to a terrible crash 277 00:37:37.420 --> 00:37:41.420 again, we're not talking about inter-temporal misallocation 278 00:37:41.420 --> 00:37:43.420 that's only about the fractional reserve principle 279 00:37:43.420 --> 00:37:52.420 it would have led to a crash of the bank around 1968, 1971 280 00:37:52.420 --> 00:38:06.420 If we had not again changed institutions, which institutional innovation had we this time, well we abandoned banking altogether and we introduced money production. 281 00:38:06.420 --> 00:38:16.420 We dispensed the Federal Reserve with the necessity to redeem its tickets and allowed it just to go on printing money without redeeming it. 282 00:38:16.420 --> 00:38:27.420 And through this decision of President Nixon at the time, we had roughly, that was roughly the equivalent of what one could call economic transubstantiation. 283 00:38:27.420 --> 00:38:37.420 You know the Catholic doctrine of transubstantiation, the priest consecrates the wine and the bread and then it becomes the body and blood of Jesus Christ. 284 00:38:37.420 --> 00:38:45.420 So in this case, when President Nixon uttered his famous words, we close the gold window. 285 00:38:45.420 --> 00:38:50.100 The physical appearance was still the same, right? You still had the bank, right? 286 00:38:50.100 --> 00:38:52.540 The building. 287 00:38:52.540 --> 00:38:57.300 It looked very solid with columns and so on. 288 00:38:57.300 --> 00:39:01.420 Still the same bank written on it and so on. But it was no longer a bank. 289 00:39:01.420 --> 00:39:03.180 It was a money producer. 290 00:39:03.180 --> 00:39:07.100 A bank deals with money that it does not itself produce. 291 00:39:07.100 --> 00:39:10.220 But the Federal Reserve today is the money producer. It produces dollars. 292 00:39:10.220 --> 00:39:13.660 Dollars are no longer money substitutes, they are money. 293 00:39:13.660 --> 00:39:24.060 and the dollar bills themselves, talking about these pieces of art, this looks exactly the like, 294 00:39:24.060 --> 00:39:31.580 maybe not exactly the like, but roughly the same, to be confused alike, dollar ticket in 1967. 295 00:39:33.420 --> 00:39:37.820 What's the difference? Well the difference is the ticket in 1967 could be redeemed, 296 00:39:37.820 --> 00:39:43.500 not by you Americans and other lower beings of course, but by foreign central banks, 297 00:39:43.500 --> 00:39:59.500 After closing the gold window, the physical appearance is exactly the same, didn't change, but it's no longer money substitute, that is money. 298 00:39:59.500 --> 00:40:20.500 It's not a charming prospect, but that's how it is, and so we had then in 1971, this whole thing went further up still, and that's where we are roughly now, so we are still in the expansion path, 299 00:40:20.500 --> 00:40:40.500 And of course we know that although nominally everything gets higher, our incomes become higher, GDP grows and so on, well there's some discounting when we calculate real GDP and so on, but still, all these other things grow up, nominal quantities, but that is not growth, it's just inflation, the result of inflation. 300 00:40:40.500 --> 00:40:49.500 Okay, can it go on indefinitely? That's the interesting question. It's a question that Mises raises in The Theory of Money and Credit. 301 00:40:49.500 --> 00:40:54.500 Can this scenario go on indefinitely once we are on a fiat money standard? 302 00:40:54.500 --> 00:40:58.500 And I think there are good reasons to believe that it cannot. 303 00:40:58.500 --> 00:41:06.500 First of all, because we have a credit bubble. It has become possible through the institution of fiat money. 304 00:41:06.500 --> 00:41:36.500 and even governments are confronted with the necessity of paying back money, meanwhile of course they have for several years already abandoned the doctrine that debts need to be paid back, well in any case not by government, so there's a problem here, right, so enter the phase of moral hazard, that's very dangerous, but then of course you have also something, moral hazard works itself out not only in public debts but also in entrepreneurial behavior, 305 00:41:36.500 --> 00:41:48.500 Those with good connections to the central government, to the Federal Reserve, rely on these connections to be bailed out. 306 00:41:48.500 --> 00:41:52.500 That's something that we have observed in the past 10 years at several occasions. 307 00:41:52.500 --> 00:41:59.500 I think, for example, of the bailout of the Mexican government in 1974, long-term capital management, 308 00:41:59.500 --> 00:42:07.900 Several players involved in the Asian crisis of 1997 have been bailed out, not all of them, 309 00:42:07.900 --> 00:42:12.060 because you have to punish some, right? 310 00:42:12.060 --> 00:42:17.020 But so, I mean, this force, of course, what it does is to encourage overly risky behavior, 311 00:42:17.020 --> 00:42:24.940 this wasting of resources, and forces the central bank to engage ever more in bailing out, 312 00:42:24.940 --> 00:42:29.420 which can only be done by such an increase in the quantity of money that it comes to a hyperinflation. 313 00:42:29.420 --> 00:42:35.420 So that's one scenario that lies ahead of us. I don't say it's of necessity. There are several other scenarios also. 314 00:42:35.420 --> 00:42:46.420 For example, you can just regulate the whole economy as you regulate the banking sector, thus preventing overly risky investments. 315 00:42:46.420 --> 00:42:56.420 In the banking sector, we've done this in the past 70 years in all countries, all Western countries, but it might come also in the other sectors. 316 00:42:56.420 --> 00:43:04.420 Okay, but I will not go into this, so the point is only, this certainly cannot go on indefinitely, it will have a terrible ending, sooner or later. 317 00:43:05.420 --> 00:43:19.420 Okay, so now, our starting point was, whereas the illusion of fractional reserve banking, illusion of fractional reserve banking consists in the fact that the bank customers think in the aggregate, 318 00:43:19.420 --> 00:43:27.420 They can rely on higher quantities of a certain resource, money, than really exist in the economy. 319 00:43:27.420 --> 00:43:36.420 And that, sooner or later, becomes revealed as an error. So we get the cyclical pattern. 320 00:43:36.420 --> 00:43:50.420 But of course that's not the only institution, as I said, fiat money entails very similar consequences. 321 00:43:50.420 --> 00:44:05.420 Now that does not mean that the standard Austrian story, as we have heard it in Mises, Rothbard, Hayek, no longer applies, but it is just one part of the story. 322 00:44:05.420 --> 00:44:10.940 So the the cyclical pattern would exist independent of inter-temporal misallocation and story 323 00:44:10.940 --> 00:44:16.660 that is the subject matter of the traditional Austrian business cycle theory but this traditional 324 00:44:16.660 --> 00:44:24.820 theory still applies to certain cases and certainly applied to the 1920s great boom 325 00:44:24.820 --> 00:44:30.540 which ended in the great great depression so here we had a case of inter-temporal misallocation 326 00:44:30.540 --> 00:44:34.660 we can raise the question and that's an interesting subject maybe for doctoral dissertation and 327 00:44:34.660 --> 00:44:39.060 and so on, in how far the present investments 328 00:44:39.060 --> 00:44:41.540 in the welfare state would also count 329 00:44:41.540 --> 00:44:44.640 as inter-temporal misallocation of resources, right? 330 00:44:50.420 --> 00:44:55.420 Okay, further problems, a few remarks on other questions. 331 00:45:04.660 --> 00:45:18.660 The area which the Austrian business cycle theory is least enveloped is the bust phase. 332 00:45:18.660 --> 00:45:31.660 So we have really no, I mean the picture that we have of the bust phase is by far not as detailed as the one that we have of the phase that leads to the bust. 333 00:45:31.660 --> 00:45:37.660 Professor Garrison has emphasized that the Austrian theory is ultimately a theory of the crisis. 334 00:45:37.660 --> 00:45:40.660 How does it come to the crisis? Okay. 335 00:45:40.660 --> 00:45:49.660 So, I mean the bus phase is interesting and we have, it's probably worthwhile to take a closer look at this. 336 00:45:49.660 --> 00:45:53.660 Let me give you just one example why this could be interesting. 337 00:45:53.660 --> 00:46:06.660 In the account that Mises gives us, what happens in a bust if the banks, commercial banks, central banks, or maybe also the money producer, bail out the market participants. 338 00:46:06.660 --> 00:46:12.660 Now here, Mises tells us, well, they do not really solve the problem, they only amplify the problem. 339 00:46:12.660 --> 00:46:22.660 They pump more money into the economy, again reduce the interest rate below the equilibrium level, and thus increasing inter-temporal misallocations of resources. 340 00:46:22.660 --> 00:46:27.660 Now, in the light of what I've explained before, that is not necessarily true, right? 341 00:46:27.660 --> 00:46:35.660 It's not necessarily the case that this additional influx of money decreases the interest rate below the equilibrium level. 342 00:46:35.660 --> 00:46:42.660 What it certainly does is to bring about a distribution of resources different from the one they would otherwise have obtained. 343 00:46:42.660 --> 00:46:49.660 So what we certainly have in such a situation, and that's also what we can almost patently observe, 344 00:46:49.660 --> 00:46:57.660 And the empirical record, if you look at things like Mexican bailout, LTMC bailout and so on, is that we have bailouts. 345 00:46:57.660 --> 00:47:11.660 So some market participants are saved by the monetary authorities at the expense of all other owners of money whose money cash balances have now a lower purchasing power. 346 00:47:11.660 --> 00:47:21.660 So it's not necessarily the case that we have to say, well, what happens in such situations is that we amplify the problem that existed before. 347 00:47:21.660 --> 00:47:29.660 It could be, okay, we liquidate our investments in the midst of an increase of a quantity of money. 348 00:47:29.660 --> 00:47:44.660 Think of the last bust that we had at the end of 2001, when the stock market boom collapsed, certain investments had to be liquidated 349 00:47:44.660 --> 00:47:54.660 and were liquidated in the midst of an enormous increase of the quantity of money. 350 00:47:54.660 --> 00:47:59.220 I might leave okay so has this really amplified misallocation of resources I 351 00:47:59.220 --> 00:48:04.660 would say yes but not necessarily in the way Mises describes the process as an 352 00:48:04.660 --> 00:48:08.620 investment in additional projects commercial projects that are 353 00:48:08.620 --> 00:48:14.300 understandable I would rather say okay my impression is that the record is we 354 00:48:14.300 --> 00:48:18.020 have additional investments in welfare-safe projects we have bailing out 355 00:48:18.020 --> 00:48:27.620 of certain market participants and the bill is paid by the great majority of 356 00:48:27.620 --> 00:48:36.300 other cash balance holders so there are there seems to be a great variety of 357 00:48:36.300 --> 00:48:40.100 possibilities of what can happen in a bust and what we would need is the much 358 00:48:40.100 --> 00:48:45.580 more detailed theory of the bust that goes through case by case all the 359 00:48:45.580 --> 00:48:48.500 and various possible scenarios. 360 00:48:48.500 --> 00:48:51.500 That's also a very nice subject for a doctoral dissertation. 361 00:48:52.740 --> 00:48:57.380 Another problem that we, now I will conclude with this, 362 00:48:57.380 --> 00:49:01.340 is the problem of, well, how do we evaluate the meltdown, 363 00:49:01.340 --> 00:49:04.540 the financial meltdown, the deflation depression 364 00:49:04.540 --> 00:49:06.100 from a political point of view? 365 00:49:07.460 --> 00:49:09.180 In his lecture this morning, 366 00:49:09.180 --> 00:49:11.900 Professor Garrison has pointed out that, 367 00:49:11.900 --> 00:49:23.900 Well, it's a bad thing to let all these prices drop, and it's even worse if you try to prevent them from dropping. 368 00:49:23.900 --> 00:49:27.900 Once they are dropping, I try to reflate the economy. 369 00:49:27.900 --> 00:49:31.900 Now, I agree entirely with him on the second proposition. 370 00:49:31.900 --> 00:49:37.900 Once prices are in the process of dropping, it's very bad to re-inflate from another side, 371 00:49:37.900 --> 00:49:53.900 because you prevent this liquidation process, you prevent, in any case you make it much more difficult for entrepreneurs to act in this business environment which is characterized by the intervention of two violent scissors. 372 00:49:53.900 --> 00:50:05.900 On the one hand you drop off the market prices as a consequence of the inflation depression, on the other hand you have this huge influx of money, it's difficult to calculate the overall effect of these two things. 373 00:50:05.900 --> 00:50:10.700 and I would disagree with the first proposition that it is necessarily a bad 374 00:50:10.700 --> 00:50:15.860 thing that prices drop and that you have this meltdown and so I think that the 375 00:50:15.860 --> 00:50:21.100 meltdown has many charms in particular from a political perspective in that it 376 00:50:21.100 --> 00:50:27.540 threatens the positions of the economic power base so to say of the political 377 00:50:27.540 --> 00:50:33.460 establishment and I don't think that that is a cynical attitude I think it is 378 00:50:33.460 --> 00:50:43.460 It's a very realist and healthy attitude. It certainly brings about a very violent change of the elites. 379 00:50:43.460 --> 00:50:54.460 In a market economy, if you had a free society, democracy or any other political system, maybe no political system at all, 380 00:50:54.460 --> 00:50:59.460 elites would constantly change as the entrepreneurs in a market economy. 381 00:50:59.460 --> 00:51:03.060 Economy and only those who provide the consumers with the most important goods 382 00:51:03.060 --> 00:51:07.620 at any point of time stay in business all others go bankrupt and thus have to 383 00:51:07.620 --> 00:51:12.140 become employees again and in politics is very similar only the leadership that 384 00:51:12.140 --> 00:51:17.820 is really capable of leading making wise decisions and so on they stay so to say 385 00:51:17.820 --> 00:51:24.020 in business all others are crowded out what our present system does in 386 00:51:24.020 --> 00:51:28.260 particular not only the existence of fractional reserve banking but also the 387 00:51:28.260 --> 00:51:35.260 and the existence of fiat money is to entrench the positions of the present leadership. 388 00:51:35.260 --> 00:51:41.260 There's not enough fluctuation, not enough fresh wind coming in from competition. 389 00:51:41.260 --> 00:51:45.260 And what the deflation does is to cut the power base of these people. 390 00:51:45.260 --> 00:51:53.260 It brings about a violent decrease in the price level, destroys the debtor position of most of these people. 391 00:51:53.260 --> 00:51:56.260 There's no hope that they then can ever pay back their debts and so on. 392 00:51:56.260 --> 00:52:26.260 So they go bankrupt, and their creditors, many of their creditors with them, and I say that's not necessarily a bad thing, right, because this whole credit and well, relationship between creditor and debtor is in many ways only a nominal property layer over a layer of real factors of production that ultimately determine the well-being of a society 393 00:52:26.260 --> 00:52:31.260 In other words, it's not because we have a violent deflation that we are necessarily poor. 394 00:52:31.260 --> 00:52:40.260 It's not because prices drop dramatically that streets disappear and hotels and cars and factories and so on. 395 00:52:40.260 --> 00:52:46.260 These all still continue to exist and therefore they can be used, can continue to be used, 396 00:52:46.260 --> 00:52:53.260 even though their present owners and those who have given credit to them go bankrupt. 397 00:52:53.260 --> 00:53:05.260 And all that happens is that there's a new management, there are new owners, and they continue to manage these production facilities just as they have been let before. 398 00:53:05.260 --> 00:53:13.260 So the deflation is not a very, from a mere pure economic point of view, the deflation is not a great problem, it's not a great deal. 399 00:53:13.260 --> 00:53:22.260 It's a big problem from especially a political point of view, but I say that does not concern us very much here. 400 00:53:22.260 --> 00:53:27.620 and it is of course also a problem from a legal point of view but we had in the 401 00:53:27.620 --> 00:53:33.500 past we had such situations and even in countries such as Germany to the very 402 00:53:33.500 --> 00:53:37.180 bureaucratic legal apparatus they've been very flexible and have been able to 403 00:53:37.180 --> 00:53:41.860 accommodate this problem within a few months so there's no reason why the same 404 00:53:41.860 --> 00:53:45.860 thing should not happen in the US which relies to a much greater degree than 405 00:53:45.860 --> 00:53:50.700 Germany at the time on private arbitration and so on. I'll leave it at 406 00:53:50.700 --> 00:53:52.700 That's all for now. Thank you for watching.