WEBVTT NOTE Economic Crisis: A Look Ahead 1 00:00:00.000 --> 00:00:07.500 Beginning last September, weekend of September 8th, 2 00:00:07.500 --> 00:00:12.240 the federal government, while it would not use the term nationalize, 3 00:00:12.240 --> 00:00:17.040 it did in fact nationalize both Fannie Mae and Freddie Mac. 4 00:00:17.040 --> 00:00:24.360 The two semi-vins, semi-federal agencies, which at that point 5 00:00:24.360 --> 00:00:31.200 were supplying 90% of all of the mortgages in the United States. 6 00:00:31.200 --> 00:00:37.360 And in one weekend, without congressional discussion, 7 00:00:37.360 --> 00:00:41.120 with no announcement whatsoever, 8 00:00:41.120 --> 00:00:45.840 the housing market of the United States was nationalized. 9 00:00:45.840 --> 00:00:48.880 There was no hue and cry. 10 00:00:48.880 --> 00:00:56.080 There were no discussions of the clear unconstitutionality of the decision. 11 00:00:56.080 --> 00:01:01.480 It simply was made by the Secretary of the Treasury, 12 00:01:01.480 --> 00:01:05.920 and the next day, the following weekend, whatever business went on, 13 00:01:05.920 --> 00:01:12.720 in terms of the supposedly largest and most important single market of the American economy, 14 00:01:12.720 --> 00:01:18.040 was in fact an extension of the United States government. 15 00:01:18.040 --> 00:01:29.360 Over the next four weeks, we saw the destruction, self-destruction, of the investment banking model. 16 00:01:29.360 --> 00:01:43.360 It had existed in the United States since the 1860s and within a matter of two weeks disappeared as a functional model. 17 00:01:43.360 --> 00:01:52.160 And the reason was, the extreme leverage of the model was facing complete bankruptcy 18 00:01:52.160 --> 00:01:55.160 because of the breakdown of the financial markets. 19 00:01:55.160 --> 00:02:02.260 But more to the point, if the model was not changed to commercial banking, 20 00:02:02.260 --> 00:02:07.660 the companies would not be eligible in any way for federal money. 21 00:02:07.660 --> 00:02:15.660 And as soon as the lawyers, over one weekend, change the entire structure of the investment banking industry, 22 00:02:15.660 --> 00:02:26.660 in one weekend, both of the largest companies involved got a $10 billion bailout from the government. 23 00:02:26.660 --> 00:02:32.660 The fact that lawyers could put together a complete transformation of a company in one weekend, 24 00:02:32.660 --> 00:02:42.660 This weekend gives you some indication of the pressure that the industry was under and then it ended, effectively ended. 25 00:02:42.660 --> 00:02:48.660 There are no more investment banking houses that any of us have ever heard of. 26 00:02:48.660 --> 00:02:53.660 Mayor Stearns has gone, Goldman Sachs has gone, they're now officially commercial banks. 27 00:02:53.660 --> 00:02:58.660 Now this is the magnitude of what took place within a four week period. 28 00:02:58.660 --> 00:03:03.660 This is not some business as usual situation. 29 00:03:03.660 --> 00:03:10.160 This is a fundamental restructuring of the capital markets of the United States. 30 00:03:10.160 --> 00:03:22.060 If you look at the chart issued by the St. Louis Fed, which I do monitor, of the adjusted monetary base, 31 00:03:22.060 --> 00:03:29.160 You will see probably the most terrifying chart in Federal Reserve history. 32 00:03:29.160 --> 00:03:35.460 When the money supply, the base money supply, the high-powered money supply of the United States 33 00:03:35.460 --> 00:03:42.140 began increasing at a rate of well over 150% per annum, 34 00:03:42.140 --> 00:03:47.000 and until quite recently accelerated. 35 00:03:47.000 --> 00:03:50.220 There was some drop back in the last few weeks, 36 00:03:50.220 --> 00:03:57.540 but nothing to begin to restore what it was in September of last year. 37 00:03:57.540 --> 00:04:02.740 It indicates to me that the Federal Reserve was in panic mode 38 00:04:02.740 --> 00:04:09.700 and had to begin buying enormous quantities of debt certificates, 39 00:04:09.700 --> 00:04:16.740 increasing its balance sheet, but of course increasing it by means of fiat money 40 00:04:16.740 --> 00:04:20.420 on a scale we have never seen before, not even in wartime, 41 00:04:20.420 --> 00:04:24.580 never have we seen the expansion of the monetary base 42 00:04:24.580 --> 00:04:30.300 comparable to what took place within a period of just a few weeks last year. 43 00:04:30.300 --> 00:04:35.100 This is not business as usual. 44 00:04:35.100 --> 00:04:39.540 What they have to do is to conceal a breakdown. 45 00:04:39.540 --> 00:04:44.180 They have to conceal the massive losses of the capital markets 46 00:04:44.180 --> 00:04:51.140 as a result of fiat money and excessive leverage, in some cases, 30 and 40 to 1. 47 00:04:51.140 --> 00:04:54.420 And the losses are just horrendous. They're in the trillions. 48 00:04:54.420 --> 00:05:00.780 They're in the tens of trillions of dollars worldwide in just a few months. 49 00:05:00.780 --> 00:05:04.180 And the Federal Reserve's response and the response of the Bank of England, 50 00:05:04.180 --> 00:05:07.060 the response of central banks around the world is the same, 51 00:05:07.060 --> 00:05:09.980 and that is to create enormous quantities of money 52 00:05:09.980 --> 00:05:20.540 in order to purchase bad assets at face value, or if not purchase, then create lending arrangements 53 00:05:20.540 --> 00:05:29.500 of bad assets at face value. It is a gigantic bailout of the fractional reserve banking system. 54 00:05:29.500 --> 00:05:37.500 And for those of us who have spent our years as adults studying banking and monetary history 55 00:05:37.500 --> 00:05:43.300 on the assumption that there is only one law of American banking and that is major New 56 00:05:43.300 --> 00:05:51.100 York banks will not be allowed to fail and that that law has been dominant since 1914. 57 00:05:51.100 --> 00:05:56.820 We have seen the result of the operation of that law. 58 00:05:56.820 --> 00:06:02.640 I believe we're coming into a period of serious, obviously monetary inflation, that's already 59 00:06:02.640 --> 00:06:03.640 a done deal. 60 00:06:03.640 --> 00:06:07.840 I think we're coming into a period of price inflation. 61 00:06:07.840 --> 00:06:12.300 It's going to take some time because the banks, the fractional reserve banks are panicked 62 00:06:12.300 --> 00:06:17.600 and they're not lending all of the money out that they are legally allowed to lend. 63 00:06:17.600 --> 00:06:24.800 They're keeping it at the Federal Reserve at 0% interest as excess reserves. 64 00:06:24.800 --> 00:06:28.440 And that tells me they are panic stricken. 65 00:06:28.440 --> 00:06:32.760 They will not lend to anything even for a positive rate of interest. 66 00:06:32.760 --> 00:06:34.720 They prefer to keep it at the Fed. 67 00:06:34.720 --> 00:06:40.960 When that changes, we're going to see that money flow into the economy and that is going 68 00:06:40.960 --> 00:06:47.260 to result in excessive price inflation for American peacetime. 69 00:06:47.260 --> 00:06:54.040 I believe we're now, if you want a phrase, a simple phrase, I'm going to modify a phrase 70 00:06:54.040 --> 00:07:01.520 that is in fact apocryphal, which is attributed to Marie Antoinette who was told that the 71 00:07:01.520 --> 00:07:10.800 The Parisians could not buy bread and she supposedly responded, let them eat cake. 72 00:07:10.800 --> 00:07:17.520 I think what is happening in America today that the Federal Reserve system has decided 73 00:07:17.520 --> 00:07:22.320 that the solution is let them eat digits. 74 00:07:22.320 --> 00:07:29.400 And I think we are seeing the massive expansion of the money supply to conceal the implicit 75 00:07:29.400 --> 00:07:36.760 Bankruptcy of the Capital Markets today, and that this is a digital illusion for the sake 76 00:07:36.760 --> 00:07:46.240 of keeping large entities out of bankruptcy court and bringing a kind of panic around 77 00:07:46.240 --> 00:07:54.360 the world. And of course, it's not just our banks, European banks, UBS, they seem to announce 78 00:07:54.360 --> 00:08:04.360 A billion dollar loss every weekend. It's just extraordinary how much money UBS has lost. 79 00:08:04.360 --> 00:08:11.520 And the losses that are being sustained with the loans that had been made to Eastern Europe 80 00:08:11.520 --> 00:08:18.560 in currencies that are collapsing, that cannot be paid back in the euro, is creating questions 81 00:08:18.560 --> 00:08:23.260 Questions of Solvency for Banks All Across Europe. 82 00:08:23.260 --> 00:08:27.720 There is supposedly at least a report that was published in The Telegraph about a month 83 00:08:27.720 --> 00:08:36.780 ago which said that the estimate is that there are something in the range of 20 to 25 trillion 84 00:08:36.780 --> 00:08:44.940 dollars of expected losses in the Euro zone. 85 00:08:44.940 --> 00:08:46.980 Let them eat digits. 86 00:08:46.980 --> 00:08:54.600 There will be concealment and the means of the concealment of, in fact, enormous losses 87 00:08:54.600 --> 00:09:03.200 of capital will be the improvement of the ledgers by means of digits. 88 00:09:03.200 --> 00:09:05.640 But capital is not digits. 89 00:09:05.640 --> 00:09:07.380 Capital is thrift. 90 00:09:07.380 --> 00:09:14.620 Capital is the willingness to save, to defer gratification in the present for the sake of 91 00:09:14.620 --> 00:09:18.860 of the hope of increased profitability in the future. 92 00:09:18.860 --> 00:09:25.640 There must be a restriction of consumption in order to provide capital for future growth. 93 00:09:25.640 --> 00:09:30.780 That is the basis of certainly Austrian capital theory. 94 00:09:30.780 --> 00:09:38.540 And we are not seeing massive restraint on the part of consumers in order to make capital 95 00:09:38.540 --> 00:09:40.860 available to businesses. 96 00:09:40.860 --> 00:09:48.140 We are seeing massive lack of restraint by the central banks in order to create digits 97 00:09:48.140 --> 00:09:56.420 which will be used to conceal the magnitude of the breakdown of the capital markets. 98 00:09:56.420 --> 00:09:58.460 It is deception on a massive scale. 99 00:09:58.460 --> 00:10:00.820 Now it always has been. 100 00:10:00.820 --> 00:10:01.900 It always has been. 101 00:10:01.900 --> 00:10:10.540 And in fact, the Austrian theory of the trade cycle, which Mises first promoted in 1912, 102 00:10:10.540 --> 00:10:13.040 on the nature of deception. 103 00:10:13.040 --> 00:10:15.040 He asked that fundamental question, 104 00:10:15.040 --> 00:10:20.040 why is it that entrepreneurs make the same mistake 105 00:10:20.040 --> 00:10:24.040 at the same time, both in the boom phase 106 00:10:24.040 --> 00:10:25.540 and in the bust phase? 107 00:10:25.540 --> 00:10:28.540 That was the question that triggered his theory. 108 00:10:28.540 --> 00:10:31.040 And his answer to it was, 109 00:10:31.040 --> 00:10:36.040 there has to be some central source of the error. 110 00:10:36.040 --> 00:10:39.040 And that is the central banking system 111 00:10:39.040 --> 00:10:46.300 and Fractional Reserve Banking, and he said that's where you have to look for the malinvestment 112 00:10:46.300 --> 00:10:53.440 both in the boom phase and the far side of the boom phase, the bust, recession, depression, 113 00:10:53.440 --> 00:11:00.800 in which real capital pricing is reestablished by the market. It was deception in the boom 114 00:11:00.800 --> 00:11:08.880 phase and it is the market's attempt to establish accurate free market pricing for the capital 115 00:11:08.880 --> 00:11:21.880 He said it was deception, deceptively low interest rates which were a result of monetary inflation by the central bank. 116 00:11:21.880 --> 00:11:31.880 That is what we saw, that is the irrational exuberance, Schiller's phrase that was appropriated by Greenspan. 117 00:11:31.880 --> 00:11:37.880 It was irrational exuberance based on massive deception and that is fiat money. 118 00:11:37.880 --> 00:11:48.880 Money. And now, in this phase that we're going through, we had from 2007 August to essentially 119 00:11:48.880 --> 00:11:57.300 September 2008, you had the attempt of the market process to reestablish the real value 120 00:11:57.300 --> 00:12:04.960 of capital assets. And now we are going to have deception on a massive scale because 121 00:12:04.960 --> 00:12:12.440 Because the central banks do not dare allow the cartel to break down because of the accurate 122 00:12:12.440 --> 00:12:19.120 pricing of capital assets. So, I think we come into an age of deception, which is massive, 123 00:12:19.120 --> 00:12:24.040 unprecedented in American peacetime history. You may have had it in World War II, but I 124 00:12:24.040 --> 00:12:31.280 don't think we have seen it since that time. And the main area of deception is going to 125 00:12:31.280 --> 00:12:37.000 Maybe the value of money, the reliability of the dollar, that's what I expect. 126 00:12:37.000 --> 00:12:41.560 I don't know how long it's going to take because we are in a carry trade situation. 127 00:12:41.560 --> 00:12:51.800 There's a massive run to get dollars because the other currencies are as bad or worse. 128 00:12:51.800 --> 00:13:01.400 It is a roaring race to the edge of the precipice of the central bankers 129 00:13:01.400 --> 00:13:07.000 to see who can deceive best and most successfully fastest. 130 00:13:07.000 --> 00:13:10.600 And the result is going to be what we always knew it would be, 131 00:13:10.600 --> 00:13:14.600 and that is the destruction of fiat currencies 132 00:13:14.600 --> 00:13:21.600 And ultimately, the destruction of people who have trusted the deceivers. 133 00:13:21.600 --> 00:13:27.600 And they are deceiving on a scale today, the likes of which I would not have predicted. 134 00:13:27.600 --> 00:13:35.600 I don't think anybody would have predicted the magnitude of the expansion of high-powered money 135 00:13:35.600 --> 00:13:37.600 by the central banks worldwide. 136 00:13:37.600 --> 00:13:42.600 And I think it's going to lead to the destruction of people's dreams and hopes 137 00:13:42.600 --> 00:13:50.200 Capital Assets and everything that they have bet on, assuming that the dollar would be reliable, 138 00:13:50.200 --> 00:13:52.200 I think those dreams are now at risk.