WEBVTT NOTE The Dollar: Where's It Headed? 1 00:00:00.000 --> 00:00:03.360 Well, there's one answer, at least if we're looking at it from the long run, 2 00:00:03.360 --> 00:00:06.800 regarding what the future of the dollar is. It's simply downward. 3 00:00:06.800 --> 00:00:09.800 It's continually downward. 4 00:00:09.800 --> 00:00:13.920 If you think that in 1914, a basic middle-class car, 5 00:00:13.920 --> 00:00:18.440 automobile, the Model T, was $350, 6 00:00:18.440 --> 00:00:23.160 and a men's suit, a good suit, cost you $20. 7 00:00:23.160 --> 00:00:26.480 You can see how far downward the dollar has gone. 8 00:00:26.480 --> 00:00:41.980 Today, a Ford Taurus is much, much more than $350. It's at least $15,000, which means that the purchasing power of the dollar, at least in terms of autos, has lost 98% of its value. 9 00:00:41.980 --> 00:00:49.780 And in terms of men's suits, around 6%. It's lost about 94% of its value. 10 00:00:49.780 --> 00:00:57.220 So, I'll anticipate my conclusion regarding the long run future of the dollar, unless things change radically. 11 00:00:57.220 --> 00:01:00.580 Okay, and we'll talk about the prospects for radical change. 12 00:01:00.580 --> 00:01:05.940 But I also want to focus on the short run future of the dollar. 13 00:01:05.940 --> 00:01:14.220 In fact, if we look at the news that has been coming out, the recent financial news, 14 00:01:14.220 --> 00:01:21.180 We're seeing signs that we're really on the precipice of a deep and possibly prolonged recession. 15 00:01:21.180 --> 00:01:25.500 Most commentators, most pundits have missed this 16 00:01:25.500 --> 00:01:29.820 because they don't properly define the inflationary process. 17 00:01:29.820 --> 00:01:35.220 Only the Austrian School of Economics really has a theory of the correct, 18 00:01:35.220 --> 00:01:38.900 or a correct theory of what inflation is. 19 00:01:38.900 --> 00:01:43.340 Inflation is not simply a general rise in prices 20 00:01:43.340 --> 00:01:47.980 as almost all college professors teach in their introductory college courses. 21 00:01:47.980 --> 00:01:50.140 It's much more than that. 22 00:01:50.140 --> 00:01:54.540 The fact that prices have not been rising very greatly or very rapidly, 23 00:01:54.540 --> 00:02:01.140 consumer prices from 1991 through 1995 has misled many economists, as we'll see, 24 00:02:01.140 --> 00:02:06.940 into thinking that the U.S. economy is going to continue growing, without incident. 25 00:02:06.940 --> 00:02:11.900 Yes, growth has slowed down somewhat, but we will not have a recession. 26 00:02:11.900 --> 00:02:26.140 But now we see the unemployment rate creeping up, we see the U.S. economy having experienced a contraction in the number of jobs created in the previous month, 200,000 jobs lost, 27 00:02:26.140 --> 00:02:38.900 and we see the Fed showing the slightest signs of panic now, cutting the discount rate and cutting the Fed's fund rate, certainly not enough, however, to stave off the coming recession. 28 00:02:38.900 --> 00:02:45.620 which means to me that given that Alan Greenspan comes up for reappointment in March 29 00:02:45.620 --> 00:02:50.740 as a chairman of the Federal Reserve System and like you and I he wants to keep his job 30 00:02:50.740 --> 00:02:56.740 even though he's a lifelong Republican serving a radically liberal democratic president 31 00:02:56.740 --> 00:03:00.180 he still wants to keep that job. 32 00:03:00.180 --> 00:03:08.660 It means to me that we may face an attempt to greatly inflate the US economy in the short run. 33 00:03:08.660 --> 00:03:12.020 Those are the signs. 34 00:03:12.020 --> 00:03:17.660 Now what I want to do then is to focus first on inflation. 35 00:03:17.660 --> 00:03:20.860 I want to tell you some unvarnished truths about inflation 36 00:03:20.860 --> 00:03:26.660 that really only the Austrian School of Economics continually proclaims. 37 00:03:26.660 --> 00:03:30.660 Even the monetarists make grave errors about what inflation is 38 00:03:30.660 --> 00:03:34.860 and what the consequences of inflation are. 39 00:03:34.860 --> 00:03:36.660 And I want to explode some myths, 40 00:03:36.660 --> 00:03:43.100 some entrenched in popular myths that are perpetrated by again leading economists 41 00:03:43.100 --> 00:03:45.340 and finally 42 00:03:45.340 --> 00:03:47.340 I want to point out that 43 00:03:47.340 --> 00:03:51.420 I want to give you a little bit of details of why I think that we're 44 00:03:51.420 --> 00:03:53.420 headed for a recession 45 00:03:53.420 --> 00:03:58.380 and how a lack of economic knowledge has caused people, has caused economists 46 00:03:58.380 --> 00:04:04.780 and forecasters and economic journalists to miss the signs of the coming recession 47 00:04:04.780 --> 00:04:08.780 Let me just start with some basic truths about inflation. 48 00:04:08.780 --> 00:04:13.780 In fact, what I want to do is to tell you what you should know about inflation, 49 00:04:13.780 --> 00:04:16.780 which Austrian economists have done again and again. 50 00:04:16.780 --> 00:04:21.780 There's a great little book by Henry Hazlett called What You Should Know About Inflation, 51 00:04:21.780 --> 00:04:26.780 which is then republished as The Inflation Crisis and How to Resolve It. 52 00:04:26.780 --> 00:04:30.780 Also, these lessons can be learned in a number of books that are being sold here right now. 53 00:04:30.780 --> 00:04:33.780 I highly recommend Murray Rothbard's What Has Government Done to Our Money? 54 00:04:33.780 --> 00:04:42.780 and for a solution to inflation, there's the case of the 100% gold dollar which is being sold. 55 00:04:42.780 --> 00:04:50.780 These are very important works. They're easily understandable to the educated layman who is vitally interested in these questions. 56 00:04:50.780 --> 00:04:59.780 So I recommend them. First of all, let me point out the first truth about inflation that everyone should know but unfortunately doesn't. 57 00:04:59.780 --> 00:05:05.880 that inflation is caused by, or more correctly, is an increase in the supply of money. 58 00:05:05.880 --> 00:05:14.380 The price of money, like the price of any other good, changes when its supply increases. 59 00:05:14.380 --> 00:05:20.380 We know that when we had this explosion of high-tech products coming onto the market, 60 00:05:20.380 --> 00:05:26.680 that is, the increases in the amounts of personal computers and hand calculators, prices fell precipitously, 61 00:05:26.680 --> 00:05:32.760 despite the fact that the large companies that sold these goods would have liked to keep the prices up 62 00:05:32.760 --> 00:05:39.320 but yet hand calculators fell from in 1970 $350 to $10 and $5 today 63 00:05:39.320 --> 00:05:44.920 and the price of personal computers have come down from $20,000 to $2,000 and less 64 00:05:44.920 --> 00:05:51.400 well the same thing is true of money, the law of supply and demand applies to money 65 00:05:51.400 --> 00:05:56.280 the less scarce or the more abundant money is made, the lower its price 66 00:05:56.280 --> 00:06:02.840 Only in this case, remember the price of money is its purchasing power, what it can purchase on the market. 67 00:06:02.840 --> 00:06:10.280 So that, for example, when the price of hand calculators came down from $350 to $10, the price of a dollar increased. 68 00:06:10.280 --> 00:06:16.920 In 1970, a dollar could only buy one 350th of a hand calculator. Now it can buy one 10th of a hand calculator. 69 00:06:16.920 --> 00:06:23.560 So as prices fall, the value of money goes up. And of course, the obverse is true. 70 00:06:23.560 --> 00:06:27.640 As prices go up, the value of the dollar depreciates. 71 00:06:30.640 --> 00:06:36.080 Or to put it another way, a fall in the price of money is manifested in a rise in all other prices. 72 00:06:36.080 --> 00:06:37.760 Okay, keep that in mind. 73 00:06:37.760 --> 00:06:44.840 Now, of all the schools of economic thought, the Austrian School has been the most unflinching in its recognition of this truth. 74 00:06:44.840 --> 00:06:52.560 In fact, really the first one to adequately explain how inflation comes about 75 00:06:52.560 --> 00:06:58.640 and how it percolates through the economy was Ludwig von Mises in his book in 1912. 76 00:06:58.640 --> 00:07:06.960 He demonstrated irrefutably that every increase in supply of money brings about inflation. 77 00:07:06.960 --> 00:07:13.080 And in fact, he used this to actually stop, to arrest the Austrian inflation. 78 00:07:13.080 --> 00:07:17.480 It was a great Austrian inflation after World War I. 79 00:07:17.480 --> 00:07:25.280 And Mises went to the Austrian government, was asked by them as a leading monetary theorist 80 00:07:25.280 --> 00:07:27.280 to come up with a solution. 81 00:07:27.280 --> 00:07:30.780 Okay, now there's a story about this, which I want to read you, 82 00:07:30.780 --> 00:07:40.880 and which I think brings home Mises' insight into the quantity of money as the sole cause of inflation. 83 00:07:40.880 --> 00:07:45.840 It's not OPEC sheiks that cause inflation, it is not greedy unions that cause inflation, 84 00:07:45.840 --> 00:07:52.720 it is not temporary shortages in harvests, none of those things bring about inflation. 85 00:07:52.720 --> 00:07:56.480 So you said that they raise prices of those particular goods, oil, food and so on, 86 00:07:56.480 --> 00:08:00.000 with the same quantity of money in the economy, you would find other prices falling. 87 00:08:00.000 --> 00:08:04.200 So in general, prices wouldn't rise when the price of one particular good goes up. 88 00:08:04.200 --> 00:08:07.240 It would simply mean that consumers have to reallocate their spending, 89 00:08:07.240 --> 00:08:12.080 more money to buying oil and less money to buying McDonald's hamburgers. 90 00:08:12.080 --> 00:08:15.480 Well, Mises knew all of this. 91 00:08:15.480 --> 00:08:19.480 In 1920, Ludwig von Mises, the world-renowned economist, 92 00:08:19.480 --> 00:08:22.800 was called upon by the frantic government officials 93 00:08:22.800 --> 00:08:26.920 to give his remedy for the ever-worsening Austrian inflation. 94 00:08:26.920 --> 00:08:29.080 He agreed to meet with them on one condition, 95 00:08:29.080 --> 00:08:33.640 that it was to be at midnight on a certain street corner in Vienna. 96 00:08:33.640 --> 00:08:36.280 Although government officials were baffled by his request, 97 00:08:36.280 --> 00:08:38.560 They nevertheless agreed. 98 00:08:38.560 --> 00:08:44.520 When they met, it was quiet except for the continuous noise of machinery in an adjacent building. 99 00:08:44.520 --> 00:08:49.120 When officials asked von Mises how to solve their foremost economic problem, 100 00:08:49.120 --> 00:08:51.560 he simply pointed to the noisy building and said, 101 00:08:51.560 --> 00:08:55.920 first and foremost, you must stop that noise. 102 00:08:55.920 --> 00:08:59.320 The building was, of course, the government printing plant. 103 00:08:59.320 --> 00:09:04.640 And the sound was the printing of money 24 hours a day. 104 00:09:04.640 --> 00:09:08.960 Well, I don't know if that story is true or not, but I've heard it quite enough, 105 00:09:08.960 --> 00:09:13.840 and it is something that I think Mises would say. 106 00:09:13.840 --> 00:09:16.000 But in any case, it gets my point across. 107 00:09:16.000 --> 00:09:19.680 Nothing but increases in the quantity of money cause inflation. 108 00:09:19.680 --> 00:09:24.000 The most notorious instant of inflation is hyperinflation. 109 00:09:24.000 --> 00:09:29.600 If inflation is not caught in time, it hides off into hyperinflation, 110 00:09:29.600 --> 00:09:35.040 in which people's expectations of prices going up the next day or the next hour 111 00:09:35.040 --> 00:09:37.520 causes them to spend money even faster. 112 00:09:37.520 --> 00:09:39.280 So we get a tiger by the tail. 113 00:09:39.280 --> 00:09:42.960 In other words, we get a vicious cycle in which expectations of inflation, 114 00:09:42.960 --> 00:09:47.680 which is fueled by the government printing new money, brings about an even greater inflation. 115 00:09:47.680 --> 00:09:51.200 Now, this occurred in Weimar, Germany. 116 00:09:51.200 --> 00:09:53.920 Let me just give you an idea. 117 00:09:53.920 --> 00:10:05.120 In 1913, to compare the price level in 1913 and 1923, at the end of this hyperinflation, prices had risen one trillion times. 118 00:10:05.120 --> 00:10:19.280 So if you had bought a house for $100,000 today, if it's something like that, in two years, it would be $100 trillion, or actually more than that, $100,000 trillion. 119 00:10:19.280 --> 00:10:22.560 And of course, we hear many of the stories, but they're true. 120 00:10:22.560 --> 00:10:27.480 People were bringing wheelbarrows full of German marks to market 121 00:10:27.480 --> 00:10:30.000 to purchase things like a pound of butter. 122 00:10:30.000 --> 00:10:33.360 Women brought their laundry baskets full of these notes. 123 00:10:33.360 --> 00:10:36.320 And there were two cumbersome to carry around the store, 124 00:10:36.320 --> 00:10:37.640 so they left them out in the front. 125 00:10:37.640 --> 00:10:41.000 And robbers would run by, dump all the currency out, 126 00:10:41.000 --> 00:10:44.040 and take the laundry basket. 127 00:10:44.040 --> 00:10:46.760 It was worth more than all this. 128 00:10:46.760 --> 00:10:50.080 Mises calls this the flight into real values. 129 00:10:50.080 --> 00:10:52.480 Engineers quit their jobs in factories 130 00:10:52.480 --> 00:10:54.520 so they could become taxi drivers and waiters 131 00:10:54.520 --> 00:10:57.240 because taxi drivers and waiters got paid every half hour 132 00:10:57.240 --> 00:10:58.680 whenever they served a customer. 133 00:10:58.680 --> 00:11:00.480 So they would run at, because prices at the end 134 00:11:00.480 --> 00:11:03.520 were rising by hundreds of percent per hour. 135 00:11:03.520 --> 00:11:05.600 Prices were tripling, quadrupling per hour. 136 00:11:05.600 --> 00:11:09.680 Workers began to demand to be paid once a week, 137 00:11:09.680 --> 00:11:12.560 every day, then two and three times a day. 138 00:11:12.560 --> 00:11:14.880 Their loved ones, their fiancés, their wives, 139 00:11:14.880 --> 00:11:20.280 would wait outside the factory gates, and they would give them their check, and they would rush out and spend the money. 140 00:11:20.280 --> 00:11:26.240 In the end, prices became infinitely high, which means that a person wouldn't sell you one egg, for example. 141 00:11:26.240 --> 00:11:34.320 A farmer wouldn't sell one egg to a city dweller, no matter how much currency he offered the farmer. 142 00:11:34.320 --> 00:11:39.680 Now, how did the government react to this? Typically, stupidly. 143 00:11:39.680 --> 00:11:43.480 The government inflation had set off, the printing of money had set off the inflation, 144 00:11:43.480 --> 00:11:47.760 which in turn generated these inflationary expectations, people expecting prices to go up. 145 00:11:47.760 --> 00:11:53.640 So on that expectation, they were spending money even more quickly. 146 00:11:53.640 --> 00:11:58.400 And what happened was that now prices began to rise faster than the increase in the money supply 147 00:11:58.400 --> 00:12:01.840 because of people's reactions. 148 00:12:01.840 --> 00:12:08.600 And there was not enough currency because sellers were raising prices to anticipate tomorrow's prices, 149 00:12:08.600 --> 00:12:11.660 Tomorrow's Demands, there wasn't enough currency today. 150 00:12:11.660 --> 00:12:14.280 So how did the German government solve this? 151 00:12:14.280 --> 00:12:18.160 Well, it took over all 2,000 printing plans in Germany 152 00:12:18.160 --> 00:12:21.200 and it took over all stocks of paper 153 00:12:21.200 --> 00:12:23.080 and it began to print day and night. 154 00:12:23.080 --> 00:12:26.320 That part of the story about Mises certainly was true, 155 00:12:26.320 --> 00:12:28.320 certainly true in Germany. 156 00:12:28.320 --> 00:12:30.040 But at the end, they couldn't keep up. 157 00:12:30.040 --> 00:12:32.800 So what they began to do was simply to recall the notes 158 00:12:32.800 --> 00:12:33.760 they had issued from the banks. 159 00:12:33.760 --> 00:12:35.920 So if you had a 1,000 mark note, 160 00:12:35.920 --> 00:12:37.680 and I have one here and I'll pass it around, 161 00:12:37.680 --> 00:12:41.680 They simply stamped over it one million marks, which is one billion. 162 00:12:41.680 --> 00:12:45.680 They were just stamping. They traded denominations overnight just by stamping them. 163 00:12:45.680 --> 00:12:48.680 I'll pass that around at the end. 164 00:12:48.680 --> 00:12:53.680 This occurs in the modern world. For example, in Serbia, 165 00:12:53.680 --> 00:13:00.680 the way the Serbian government is financing its support of the Serbs in Bosnia 166 00:13:00.680 --> 00:13:04.680 is through inflation, and it's suffering also from an embargo. 167 00:13:04.680 --> 00:13:17.680 So, it turns out that the inflation rate has been, for a period last year, 10% daily. Price is rising 10% every day, which translates to an annual rate of inflation in the quadrillions. 168 00:13:17.680 --> 00:13:25.680 It now costs to buy a candy bar, a Snickers bar in Serbia, what it costs two years before to buy an automobile. 169 00:13:25.680 --> 00:13:31.680 So, it's as if in two years, then, we'd be paying $20,000 for a Baby Ruth bar. 170 00:13:31.680 --> 00:13:37.180 So, inflation is dangerous. It's a tiger held by the tail, very precariously. 171 00:13:37.180 --> 00:13:41.680 The tiger can break loose at any time and consume the economy. 172 00:13:41.680 --> 00:13:47.380 Fortunately, there was gold circulating in Germany, there were dollars circulating in Germany. 173 00:13:47.380 --> 00:13:55.380 So, what Mises called, Hans, correct my German, the Katastrophenhausen, which is the crack-up boom, 174 00:13:55.380 --> 00:13:58.080 did not occur in Germany, but it would occur in the United States. 175 00:13:58.080 --> 00:14:02.780 There are not alternative currencies circulating. We would be thrust back into the border. 176 00:14:04.780 --> 00:14:09.780 To avoid that, we have to avoid increasing the money supply. It's as simple as that. 177 00:14:11.080 --> 00:14:15.780 Now, let me say something else about another truth, another homey truth about inflation 178 00:14:15.780 --> 00:14:19.980 that most economists understand, but they try to soft-pedal. 179 00:14:19.980 --> 00:14:26.480 And that is, our very banking transactions under our modern banking system 180 00:14:26.480 --> 00:14:30.080 are inherently inflationary. 181 00:14:30.080 --> 00:14:34.480 That is, fractional reserve banking is inherently inflationary. 182 00:14:34.480 --> 00:14:38.160 There's no other way to put that. There's no appeal from that. 183 00:14:38.160 --> 00:14:41.360 There's no way to say, well, if it's competitive, that's really not the case, 184 00:14:41.360 --> 00:14:46.720 they'll adjust the quantity of money correctly. Incorrect, wrong. 185 00:14:46.720 --> 00:14:49.760 Fractional reserve banking is inflationary. 186 00:14:49.760 --> 00:14:55.840 So that if you were to put $10,000 worth of currency into a checking account today, 187 00:14:55.840 --> 00:15:01.440 In a few days' time, that would be multiplied into a multiple expansion of the money supply. 188 00:15:01.440 --> 00:15:07.760 Your bank is only legally obligated to keep 10% of your deposit in its vaults. 189 00:15:07.760 --> 00:15:12.240 Actually, it keeps it with the Federal Reserve Bank in its district, as a reserve, 190 00:15:12.240 --> 00:15:16.640 but they can lend out 90% of the currency so deposited, 191 00:15:16.640 --> 00:15:22.000 which means then that you have a $10,000 checking account that you can draw on up to $10,000, 192 00:15:22.000 --> 00:15:27.500 Yet someone else, a borrower, now has 9,000 new dollars that have been loaned out. 193 00:15:27.500 --> 00:15:31.200 Now, when that money is spent by the borrower, it's redeposited in another bank. 194 00:15:31.200 --> 00:15:33.400 So once again, 90% can be loaned out. 195 00:15:33.400 --> 00:15:36.400 So you have the creation of another $8,100. 196 00:15:36.400 --> 00:15:39.000 Now, if you took this to its limit, this can be multiplied. 197 00:15:39.000 --> 00:15:45.400 Every dollar that you deposit in your checking account can be multiplied approximately 10 times in today's economy. 198 00:15:45.400 --> 00:15:51.100 So that $10,000 would result in a few weeks' time in a $100,000 increase in our money supply. 199 00:15:51.100 --> 00:15:54.780 Well, actually, a $100,000 increase in checking account money. 200 00:15:54.780 --> 00:15:58.420 You'd have to subtract the $10,000 of currency from that that you originally deposited. 201 00:15:58.420 --> 00:16:02.660 Okay. So that's very important to keep in mind. That's the second... 202 00:16:02.660 --> 00:16:05.700 Oh, and let me just mention also that in mid-January, 203 00:16:05.700 --> 00:16:12.380 total checkable deposits in our banking system were $733 billion. Okay. 204 00:16:12.380 --> 00:16:18.460 Now, how much money was backing that up? In actual reserves, $100 billion. 205 00:16:18.460 --> 00:16:22.100 So in other words, think about it, if everyone decided, 206 00:16:22.100 --> 00:16:26.100 which they are legally permitted to do, to withdraw their currency 207 00:16:26.100 --> 00:16:30.660 from their demand deposits, and by the way, this tends to happen during Christmas, 208 00:16:30.660 --> 00:16:36.260 and the Fed scrambles to add more reserves, only out of the 733 billion, 209 00:16:36.260 --> 00:16:40.140 people would only be able to receive 100 billion, 210 00:16:40.140 --> 00:16:43.140 and the whole banking system would collapse. 211 00:16:43.140 --> 00:16:48.420 When I was at Boston College as an undergraduate in the heyday of the student revolution, 212 00:16:48.420 --> 00:17:18.420 The new left up in Boston, there was an underground newspaper and they put out a call for all students, there were 250,000 students in Boston, all college students, to go to the bank the coming Friday, these new leftists, some of them were economists, they were new left economists, and to take out all your money from your demand deposits. That would have put the Boston banks in deep trouble, okay? Had it been a call by a libertarian, I may have gone, but since it was a left 213 00:17:18.420 --> 00:17:21.860 When you're calling for it, I would have liked to pull my money up, but I didn't. 214 00:17:21.860 --> 00:17:23.660 And not many people did, and there was no problem. 215 00:17:23.660 --> 00:17:29.380 But that is the result of the very nature of fractional reserve banking. 216 00:17:29.380 --> 00:17:34.660 OK, thirdly, it's important to realize that an increase of the money supply 217 00:17:34.660 --> 00:17:39.620 does not bring about an increase in wealth or human welfare, OK? 218 00:17:39.620 --> 00:17:43.340 In other words, it doesn't add one more item of consumer goods 219 00:17:43.340 --> 00:17:46.460 that directly satisfies our wants. 220 00:17:46.460 --> 00:17:51.060 Nor does it add any more capital goods by printing up this new money. 221 00:17:51.060 --> 00:18:00.360 In fact, all it does is to bring about a reduction in the purchasing power of money, is to raise prices. 222 00:18:00.360 --> 00:18:10.960 So in other words, if we have this dollar and I were to tear it up, there would be no destruction of wealth in our economy. 223 00:18:10.960 --> 00:18:14.360 None at all. No one is any worse off. Is anyone any worse off? 224 00:18:14.360 --> 00:18:17.240 I am worse off in my wealth position. 225 00:18:17.240 --> 00:18:21.600 Luke promised to reimburse me later for this. 226 00:18:21.600 --> 00:18:25.720 However, note what's happened. 227 00:18:25.720 --> 00:18:29.480 I now can make less demand on goods and services in the economy. 228 00:18:29.480 --> 00:18:31.040 Their number hasn't changed. 229 00:18:31.040 --> 00:18:34.600 In effect, this is the essence of the inflationary process or deflation. 230 00:18:34.600 --> 00:18:39.240 Wealth has been redistributed, not destroyed, redistributed away from me, 231 00:18:39.240 --> 00:18:43.560 who now has less currency toward you. 232 00:18:43.560 --> 00:18:54.440 There's a slight, slight, slight tendency towards a fall in prices, because of the subtraction of that dollar for more money supply. 233 00:18:54.440 --> 00:18:58.360 I think it was worth the rise, the one dollar. 234 00:18:58.360 --> 00:19:06.280 Anyway, now, it doesn't make it any more difficult to exchange goods and services. 235 00:19:06.280 --> 00:19:08.200 Nothing bad happened to the economy as a result of that. 236 00:19:08.200 --> 00:19:13.520 I just perpetrated a monetary deflation in our economy. 237 00:19:13.520 --> 00:19:21.520 I'll come back to that point. Let me bring up another important point about inflation. 238 00:19:21.520 --> 00:19:29.520 This is one of my pet peeves. You continually read in the financial press and also you hear statements by Alan Greenspan 239 00:19:29.520 --> 00:19:35.520 that we have to cool the economy off. We have too much economic activity. There's too much economic growth. 240 00:19:35.520 --> 00:19:42.520 We're in jeopardy of bringing about a precipitating inflation. We can't grow at 3%. 241 00:19:42.520 --> 00:19:46.520 We can only, we have to cool it down at 2%. That's nonsense and it's evil. 242 00:19:46.520 --> 00:19:50.520 It's evil because it's saying that scarcity is better for human beings. 243 00:19:50.520 --> 00:19:55.520 Okay? That's evil for human beings. We want more economic growth. 244 00:19:55.520 --> 00:19:59.520 Okay? We don't want to, in other words, people's preferences are such, of course, 245 00:19:59.520 --> 00:20:02.520 that they want to save more for the future and bring about economic growth. 246 00:20:02.520 --> 00:20:06.520 There's no reason why that economic growth cannot occur on a free market. 247 00:20:06.520 --> 00:20:09.520 In fact, it's really the other way around. 248 00:20:09.520 --> 00:20:15.520 economic growth, because it leads to greater output of goods and services, brings about falling prices 249 00:20:15.520 --> 00:20:19.520 not the other way around, okay, brings about falling prices 250 00:20:19.520 --> 00:20:27.520 we see that in the computer, in the high-tech industries, they've grown phenomenally since the mid-70s, since the microchip revolution 251 00:20:27.520 --> 00:20:35.520 and yet prices have fallen, okay, prices of personal computers have fallen from $20,000 to $2,000 252 00:20:35.520 --> 00:20:40.520 I don't see any computer firms. I see a growth in the number of computer firms. 253 00:20:40.520 --> 00:20:46.920 Now, individual firms have gone out of business, but the more efficient firms have expanded, and new firms have come in. 254 00:20:46.920 --> 00:20:51.920 So, falling prices, and I'll get to that, actually, that's my next point. 255 00:20:51.920 --> 00:20:57.620 Falling prices does not hinder economic growth, nor does economic growth cause inflation. 256 00:20:57.620 --> 00:21:04.620 Economic growth brings about, as it did in the 19th century when we were on the gold standard, a gently falling price level. 257 00:21:04.620 --> 00:21:07.860 We've had growth in hand calculators, prices have fallen. 258 00:21:07.860 --> 00:21:11.540 When ballpoint pens were first introduced in 1946, 259 00:21:11.540 --> 00:21:15.420 their price was $18, $19, they were first sold at Gimbals. 260 00:21:15.420 --> 00:21:22.660 Within two years' time, we had hundreds of ballpoint pen companies and the price was 39 cents. 261 00:21:22.660 --> 00:21:27.740 I don't see an inflation of the prices of ballpoint pens occurring because of the growth in the industry, that's ridiculous. 262 00:21:27.740 --> 00:21:30.180 The economy is made up of individual industries. 263 00:21:30.180 --> 00:21:34.180 So if it doesn't happen in one industry, it ain't going to happen throughout the economy, okay? 264 00:21:36.180 --> 00:21:42.180 Okay, economic growth also, as I said, does not require an expansion of the money supply. 265 00:21:43.180 --> 00:21:47.180 In fact, each dollar becomes more powerful as prices fall, okay? 266 00:21:47.180 --> 00:21:52.180 As the price of ballpoint pens fell from, let's say, $20 down to 39 cents, 267 00:21:52.180 --> 00:21:57.180 those additional ballpoint pens were easily sold because each dollar could buy more ballpoint pens. 268 00:21:57.180 --> 00:21:59.180 The same thing is true with computers. 269 00:21:59.180 --> 00:22:03.180 and Computers. Each dollar has a greater value in terms of computers. 270 00:22:03.180 --> 00:22:07.180 So, as we would say in Austrian economics, that as prices fall, 271 00:22:07.180 --> 00:22:11.180 the real quantity of money in our economy goes up. 272 00:22:11.180 --> 00:22:15.180 Not the number of physical dollars, but the amount that each dollar 273 00:22:15.180 --> 00:22:19.180 can purchase. So if we have 5% growth, if there's 5% more 274 00:22:19.180 --> 00:22:23.180 goods and services in our economy, we don't have to worry that, well, how are we going to buy this extra 275 00:22:23.180 --> 00:22:27.180 5% of goods and services without extra dollars? 276 00:22:27.180 --> 00:22:34.780 In fact, the market will cause prices to fall, as they have, as I said, with hand calculations and so on, by about 5%. 277 00:22:34.780 --> 00:22:41.480 So each dollar will be worth 5% more. Hence, the entire money supply will be worth, in real terms, 5% more. 278 00:22:41.480 --> 00:22:48.580 We'll be able to afford those new goods, those additional goods and services. 279 00:22:48.580 --> 00:22:56.680 Nor does deflation or falling prices lead to recession or unemployment. 280 00:22:56.680 --> 00:23:01.360 In fact, falling prices result from falling costs. 281 00:23:01.360 --> 00:23:06.200 As technology improves, as we get a greater investment in capital goods, 282 00:23:06.200 --> 00:23:08.760 which makes labor productivity greater, 283 00:23:08.760 --> 00:23:12.840 as it allows permits workers to produce more, 284 00:23:12.840 --> 00:23:15.480 in fact, what happens is that costs fall. 285 00:23:15.480 --> 00:23:18.000 And as costs fall, there's more competition, 286 00:23:18.000 --> 00:23:19.200 because there's greater profits, 287 00:23:19.200 --> 00:23:22.080 and that's what eventually pushes down prices. 288 00:23:22.080 --> 00:23:24.160 In fact, in the computer industry and other industries, 289 00:23:24.160 --> 00:23:26.920 Costs have fallen faster than prices have fallen. 290 00:23:26.920 --> 00:23:29.840 That's why those industries have expanded. 291 00:23:29.840 --> 00:23:33.520 So falling prices did not discourage entrepreneurs from investing in that industry. 292 00:23:33.520 --> 00:23:35.200 They are interested in the profit margin. 293 00:23:35.200 --> 00:23:39.240 The profit margin is simply the gap between the price and the cost of production. 294 00:23:39.240 --> 00:23:42.720 If costs fell, fall faster than prices. 295 00:23:42.720 --> 00:23:48.360 That gap actually is enlarged and you get more competition. 296 00:23:48.360 --> 00:23:52.160 In fact, the greatest rate of growth in the American economy 297 00:23:52.160 --> 00:23:56.760 in terms of real goods and services occurred in the 1880s. 298 00:23:56.760 --> 00:24:00.120 We were growing it between 4% and 5% per year. 299 00:24:00.120 --> 00:24:04.160 Now, we're happy if we grow 3% per year. 300 00:24:04.160 --> 00:24:06.880 And anything over that, everyone starts to worry that we're going to have inflation, 301 00:24:06.880 --> 00:24:07.880 so we have to dampen growth. 302 00:24:07.880 --> 00:24:14.000 But we grew at 5% per year, and prices fell 1% to 2% per year in the 1880s. 303 00:24:14.000 --> 00:24:16.480 You don't need rising prices to have growth. 304 00:24:16.480 --> 00:24:24.680 Nor is there a trade-off between inflation and unemployment. 305 00:24:24.680 --> 00:24:29.240 The so-called Phillips curve, named after the economist that came up with this alleged 306 00:24:29.240 --> 00:24:37.720 trade-off that he supposedly found in history, is one of the most pernicious errors in modern 307 00:24:37.720 --> 00:24:40.720 economics. 308 00:24:40.720 --> 00:24:46.280 As long as wages and salaries are set at the level at which supply equals demand, there 309 00:24:46.280 --> 00:24:52.680 There is and can be no involuntary unemployment in any economy. 310 00:24:52.680 --> 00:24:58.160 Recently Ken Griffey Jr., a star baseball player in Seattle, received $8.5 million per 311 00:24:58.160 --> 00:24:59.560 year. 312 00:24:59.560 --> 00:25:05.400 He wasn't unemployed at that price because his services were expected to generate at 313 00:25:05.400 --> 00:25:09.280 least that additional amount of money for the Seattle Mariners, his team. 314 00:25:09.280 --> 00:25:14.080 However at some point, regardless of how great a star he is, if he asked for $11 or $12 or 315 00:25:14.080 --> 00:25:18.980 $13 million per year, and that exceeded what the owners expected to get in revenue additions 316 00:25:18.980 --> 00:25:23.300 from having him on the team, then he would have been unemployed. 317 00:25:23.300 --> 00:25:25.400 There's always a right price. 318 00:25:25.400 --> 00:25:27.680 Everybody is employable at some price. 319 00:25:27.680 --> 00:25:32.520 Now, it's true that it might be that price is extremely low. 320 00:25:32.520 --> 00:25:41.600 Some teenage dropouts may have what we call a marginal revenue product of $1.50 an hour. 321 00:25:41.600 --> 00:25:46.400 That is, they only produce goods and services worth about $1.50 on the market per hour. 322 00:25:46.400 --> 00:25:50.720 But in that case, then, if they were permitted to ask for $1.50, which are not under minimum 323 00:25:50.720 --> 00:25:55.760 wage laws, they would not be unemployed. 324 00:25:55.760 --> 00:25:58.240 Or even on a world level, take Hong Kong. 325 00:25:58.240 --> 00:26:04.280 Hong Kong is a barren rock, has no natural resources, its labor force is unskilled compared 326 00:26:04.280 --> 00:26:08.840 to the U.S. labor force, it's not very productive. 327 00:26:08.840 --> 00:26:13.040 And yet, everyone there is fully employed. 328 00:26:13.040 --> 00:26:14.260 The reason? 329 00:26:14.260 --> 00:26:19.800 Their products are competitively priced on world markets, and so is their labor force. 330 00:26:19.800 --> 00:26:22.840 The reason why American workers, for example, in the steel industry or the auto industry 331 00:26:22.840 --> 00:26:29.000 may be unemployed is not because of a lack of effective demand or aggregate demand, which 332 00:26:29.000 --> 00:26:34.320 means a lack of printing up new money, it's not because of that, it's because their wages 333 00:26:34.320 --> 00:26:39.320 which are above levels that reflect their productivity, okay? 334 00:26:39.320 --> 00:26:45.320 Moreover, if you inflate, you may very well drive down unemployment for a little while. 335 00:26:45.320 --> 00:26:49.320 You do that by fooling the workers. Even Keynes knew this. 336 00:26:49.320 --> 00:26:56.320 Keynes himself, in the general theory, revealed that you increase employment 337 00:26:56.320 --> 00:27:01.320 when you increase the money supply by driving up the prices of products. 338 00:27:01.320 --> 00:27:03.320 So initially the prices of goods and services go up. 339 00:27:03.320 --> 00:27:09.320 Yet wages don't change at first, so profits are higher for firms, so they rush in and hire more workers. 340 00:27:09.320 --> 00:27:21.320 So yes, it's true you can reduce unemployment caused by minimum wages and so on by secretly or surreptitiously reducing the real wages of workers, eroding the purchasing power of their dollars. 341 00:27:21.320 --> 00:27:31.320 But when workers catch on, of course, they demand an increase in wage rates by withholding their labor, and eventually the unemployment then reappears. 342 00:27:31.320 --> 00:27:42.320 Now, I think one of the most important lessons that I can teach here is that inflation is 343 00:27:42.320 --> 00:27:45.220 not merely a general increase in prices, okay? 344 00:27:45.220 --> 00:27:49.380 It's very important to keep in mind. 345 00:27:49.380 --> 00:27:58.320 When this definition is used, it really obscures the outlines of the inflationary process. 346 00:27:58.320 --> 00:28:05.480 Okay, in other words, when the money supply is increased, when the number of dollars in 347 00:28:05.480 --> 00:28:09.600 circulation is increased, and I'll give you some idea of how great this increase has been 348 00:28:09.600 --> 00:28:14.880 since we've had the Fed established, when those number of dollars is increased, it causes 349 00:28:14.880 --> 00:28:18.240 many other things besides an increase in prices. 350 00:28:18.240 --> 00:28:27.680 In fact, many economists talk as if when inflation occurs, all prices go up by the same proportion. 351 00:28:27.680 --> 00:28:46.440 So, if the government increases the money supply in a given year by 10%, many economists, including, for example, Milton Friedman and the monitors, would hold that, well, eventually, in the long run, after a year or two, six months to 18 months, all prices will rise by approximately 10%, the same rate of increase as the increase in the money supply. 352 00:28:46.440 --> 00:28:56.960 In fact, that's incorrect, and not only is it incorrect, but it really obfuscates what's going on, who's benefiting and who's losing from inflation. 353 00:28:56.960 --> 00:29:00.720 Murray Rothbard used to talk about the angel Gabriel model of inflation. 354 00:29:00.720 --> 00:29:07.000 That is that if we all went to sleep and woke up the next day and found that our money, 355 00:29:07.000 --> 00:29:14.880 let's say our currency and our wallets, and the money in our checking accounts had been doubled miraculously by an angel. 356 00:29:14.880 --> 00:29:20.600 But an angel ignorant of economics, hoping to benefit the human race, this angel doubles everybody's money supply. 357 00:29:20.600 --> 00:29:23.200 Now, we would all rush out and spend that new money. 358 00:29:23.200 --> 00:29:26.840 We'd have extra money, right? As if we won the lottery. 359 00:29:26.840 --> 00:29:36.200 A lot of it would be spent on consumer goods, but there's no more consumer goods in the economy, so all prices would rise, roughly proportionally. 360 00:29:36.200 --> 00:29:44.080 Now, that's a good way to teach students that, in fact, an increase in the money supply does not benefit society, but we have to go deeper than that. 361 00:29:44.080 --> 00:29:53.600 In fact, new money is not dropped from helicopters, as Milton Friedman's example would lead us to believe, or brought by an angel. 362 00:29:53.600 --> 00:29:58.600 Okay, in fact, it's injected into certain segments of the economy. 363 00:29:58.600 --> 00:30:07.000 If, for example, the U.S. government wants to purchase new missile guidance systems from Silicon Valley, 364 00:30:07.000 --> 00:30:12.360 and let's assume they don't want to raise taxes, they want to pay for it by printing up new money. 365 00:30:12.360 --> 00:30:17.600 Once that new money is spent, now some people in the economy have the new money, others don't. 366 00:30:17.600 --> 00:30:21.360 I don't have it sitting in New York at Pace University, my office. 367 00:30:21.360 --> 00:30:25.000 So my wages, my salary is not going to go up for a long period of time. 368 00:30:25.000 --> 00:30:28.800 The people who get the new money, the stockholders in the firms that sell to the government 369 00:30:28.800 --> 00:30:32.080 and the highly skilled workers that work in those firms, 370 00:30:32.080 --> 00:30:34.640 will have some of the new money and they'll go out and spend it. 371 00:30:34.640 --> 00:30:40.160 And they may spend it on luxury automobiles, the stockholders, and on beer, in the case of the workers. 372 00:30:40.160 --> 00:30:42.880 Now suddenly the price of beer and luxury automobiles go up, 373 00:30:42.880 --> 00:30:46.680 and people in Detroit and Milwaukee have the new money. 374 00:30:46.680 --> 00:30:50.480 Now I'm paying more money for beer and for automobiles, 375 00:30:50.480 --> 00:30:59.580 Yet, my salary hasn't increased, so there begins a process of a depreciation or reduction of the purchasing power of my wages. 376 00:30:59.580 --> 00:31:07.480 Money or real income is being transferred from me and others in that situation to the people who have gotten the new money first. 377 00:31:07.480 --> 00:31:14.640 And of course, the people in Detroit, workers in breweries, in Milwaukee and auto workers now begin to spend that new money and drive up other prices. 378 00:31:14.640 --> 00:31:22.720 The prices of trips to Disney World and the prices of McDonald's hamburgers and so on. 379 00:31:22.720 --> 00:31:27.040 So prices go up step-by-step and as the other side of that process, 380 00:31:27.040 --> 00:31:30.560 the real wages of the people who have not gotten that new money initially go down. 381 00:31:30.560 --> 00:31:32.440 Now ultimately, most people get that new money. 382 00:31:32.440 --> 00:31:36.520 Eventually, people will buy financial services from New York City. 383 00:31:36.520 --> 00:31:39.920 They'll increase their purchase of financial services maybe a year down the road, 384 00:31:39.920 --> 00:31:43.400 in which case people in financial firms will get paid more 385 00:31:43.400 --> 00:31:47.200 and they'll go into MBA programs. I teach an MBA program at Pace University. 386 00:31:47.200 --> 00:31:52.280 And the tuition will go up at Pace. And maybe two years down the road, my salary will finally go up. 387 00:31:52.280 --> 00:31:56.640 But in those two years, during which prices throughout the economy have increased 388 00:31:56.640 --> 00:32:03.800 and my wage rate or salary is not kept up, real wealth has been redistributed from me to others in the economy. 389 00:32:03.800 --> 00:32:07.200 And you have to pity, of course, the people on fixed incomes. 390 00:32:07.200 --> 00:32:13.200 People living on pensions, insurance payments, and so on. 391 00:32:13.200 --> 00:32:15.200 These people never get that new money, 392 00:32:15.200 --> 00:32:19.200 which means that they take permanent cuts in their real incomes. 393 00:32:19.200 --> 00:32:21.200 So, what happens is that the people, 394 00:32:21.200 --> 00:32:25.200 these people who might spend money on oatmeal and Florida vacations, 395 00:32:25.200 --> 00:32:29.200 we find that their demands relatively for those things don't go up as much. 396 00:32:29.200 --> 00:32:32.200 So the prices of oatmeal and Florida vacations, 397 00:32:32.200 --> 00:32:35.200 or Florida condos if they buy condos to retire in Florida, 398 00:32:35.200 --> 00:32:41.200 of Florida, those prices may go up very little or not at all, whereas other prices go up by a great deal, luxury automobiles and so on. 399 00:32:41.200 --> 00:32:49.200 So the first lesson is that prices do not increase proportionally. 400 00:32:49.200 --> 00:33:02.200 The other point we want to make very quickly is that the way this new money is injected into the economy in today's world is through the fractional reserve banking system. 401 00:33:02.200 --> 00:33:06.760 The government, in effect, creates new reserves out of thin air. 402 00:33:06.760 --> 00:33:18.080 In 1971, or actually 1990, reserves in our banking system were $75 billion. 403 00:33:18.080 --> 00:33:20.600 That was the amount of reserves. 404 00:33:20.600 --> 00:33:23.660 Just a few days ago, the reserves were up to $100 billion. 405 00:33:23.660 --> 00:33:27.240 The government injected, over the course of the last five years, $25 billion new dollars 406 00:33:27.240 --> 00:33:28.240 into the banking system. 407 00:33:28.240 --> 00:33:31.320 Now remember, when that's loaned out, that's multiplied about tenfold. 408 00:33:31.320 --> 00:33:46.320 So it brought about, in the last five years, a massive increase of the money supply, but in doing so, in relentlessly injecting that new money day after day, up until 1993, we'll talk about what has happened in the last two years, it pushed down interest rates. 409 00:33:46.320 --> 00:33:52.320 Now what did that do? That caused businesses to borrow more, so they could buy more capital goods. 410 00:33:52.320 --> 00:33:59.320 Some of these other effects of inflation we begin to see, a drop in interest rates, a run-up in the stock market, 411 00:33:59.320 --> 00:34:07.120 which is caused by lower interest rates. If corporate earnings don't change, in fact, corporate earnings are going up because there's more money being spent on capital goods. 412 00:34:07.120 --> 00:34:14.480 On the one hand, on the other hand, they're discounting those earnings at a lower interest rate. So we see a stock market boom come about as a result of inflation. 413 00:34:14.480 --> 00:34:20.400 Also a real estate boom, as prices of industrial and commercial real estate go up. 414 00:34:20.400 --> 00:34:27.400 Also, at least up until 1995, as the U.S. dollar loses its purchasing power because of this inflation, 415 00:34:27.400 --> 00:34:31.400 in domestic terms, we begin to get a fall in the exchange rate. 416 00:34:31.400 --> 00:34:35.400 The U.S. dollar loses value on the foreign exchange markets. 417 00:34:35.400 --> 00:34:45.000 So all of these effects occur and are ignored when we define inflation as simply a rise in consumer prices. 418 00:34:45.000 --> 00:34:57.540 Now, it's this misdefinition of inflation that has misled economists on three different occasions, 419 00:34:57.540 --> 00:35:06.900 misled them seriously into denying that the U.S. economy would experience a recession. 420 00:35:06.900 --> 00:35:09.240 It occurred in the 1920s. 421 00:35:09.240 --> 00:35:16.560 In the 1920s, even though the economy, or even though the Fed increased the money supply at a fairly rapid rate, 422 00:35:16.560 --> 00:35:21.120 and if you look at Murray's book, America's Great Depression, which I recommend, 423 00:35:21.120 --> 00:35:25.800 he sets that rate at about 7% per year, consumer prices didn't go up. 424 00:35:25.800 --> 00:35:31.040 The CPI didn't go up. In fact, prices fell slightly from 1921 to 1928. 425 00:35:31.040 --> 00:35:37.280 So most economists, most American economists, led by Irving Fisher, who is Milton Friedman's mentor, 426 00:35:37.280 --> 00:35:42.000 claimed that the era of perpetual prosperity was at hand. 427 00:35:42.000 --> 00:35:46.000 Our economy was growing tremendously and yet prices were level. 428 00:35:46.000 --> 00:35:48.520 There was no inflation. 429 00:35:48.520 --> 00:35:50.360 So we would never have another depression. 430 00:35:50.360 --> 00:35:53.440 The U.S. economy was depression-proof. 431 00:35:53.440 --> 00:35:59.400 Now, Austrian economists, led by Friedrich Hayek and also including von Mises, 432 00:35:59.400 --> 00:36:01.040 looked around and said, wait a minute. 433 00:36:01.040 --> 00:36:03.800 The Federal Reserve is rapidly increasing the money supply. 434 00:36:03.800 --> 00:36:06.320 Regardless of whether or not consumer prices are going up 435 00:36:06.320 --> 00:36:10.360 and they had not been because of the tremendous increases in technology and productivity in the 20s. 436 00:36:10.360 --> 00:36:14.800 Whether or not those prices are going up, the same effects are occurring on interest rates. 437 00:36:14.800 --> 00:36:17.760 Interest rates are being pushed down, they're being distorted. 438 00:36:17.760 --> 00:36:23.720 On investment, we had an investment boom in the late 1920s, we had a real estate boom in the late 1920s. 439 00:36:23.720 --> 00:36:28.480 As a result, we had a massive distortion of the structure of production. 440 00:36:28.480 --> 00:36:35.760 Our entrepreneurs were fooled by the low interest rate into producing too many capital goods and not enough consumer goods. 441 00:36:35.760 --> 00:36:43.400 When the inflation stopped in 1928, we quickly got the Great Depression hitting us in October of 29. 442 00:36:43.400 --> 00:36:50.720 And that was predicted by Austrian economists who take a much fuller and richer view of what the inflationary process is. 443 00:36:50.720 --> 00:36:55.560 Inflation distorted relative prices, not just, didn't change overall prices. 444 00:36:55.560 --> 00:36:59.840 Now, why do I bring that up? Well, it's relevant to what's happening today. 445 00:36:59.840 --> 00:37:09.520 The so-called Reagan recovery, the Reagan prosperity of the 1980s, that seemed to be very great and to go on for a long period of time, 446 00:37:09.520 --> 00:37:17.080 at least from 1982 through 1987 when we had a stock market crash, but then it picked up again and went from 1988 to 1990. 447 00:37:17.080 --> 00:37:22.880 That was not done because of tax cuts. 448 00:37:22.880 --> 00:37:27.840 The tax cuts that the Reagan administration implemented in the early 80s were piddling tax cuts. 449 00:37:27.840 --> 00:37:35.140 They were tiny, and they were reversed, pretty much, by increases in social security taxes and so on. 450 00:37:35.140 --> 00:37:40.140 That was not what caused the seeming prosperity. 451 00:37:40.140 --> 00:37:50.840 What caused it was a massive increase in the money supply that occurred from 1982 until 1986 that was perpetrated by the Fed. 452 00:37:50.840 --> 00:37:57.240 A Fed that wanted to get President Reagan re-elected, that is, a Fed that wanted to give the incumbent president 453 00:37:57.240 --> 00:37:59.960 a monetary policy that would get him re-elected. 454 00:37:59.960 --> 00:38:07.480 And in fact, just to give you an idea of the dimensions of that inflation 455 00:38:07.480 --> 00:38:11.880 from an Austrian point of view, let me just point out that 456 00:38:11.880 --> 00:38:17.160 from 1983 through 86, the money supply increased by 17% per year. 457 00:38:17.160 --> 00:38:20.920 The Fed increased the money supply by hundreds of billions of dollars, 458 00:38:20.920 --> 00:38:25.720 printing up new money, in effect, out of thin air, okay? 459 00:38:25.720 --> 00:38:33.240 We also found that the interest rates were pushed down by the Fed. 460 00:38:33.240 --> 00:38:39.440 For example, the commercial paper rate was 8.75% on March 15, 1985. 461 00:38:39.440 --> 00:38:45.760 Two years later, it had fallen to 6.29% or about 2.5%. 462 00:38:45.760 --> 00:38:49.280 Corporate bonds fell from 12.6%. 463 00:38:49.280 --> 00:38:51.400 They fell by 4% down to 8%. 464 00:38:51.400 --> 00:38:52.880 That set off an investment boom. 465 00:38:52.880 --> 00:38:55.600 The prime rate was driven down from 10.5% to 8%. 466 00:38:55.600 --> 00:38:59.400 But economists missed all this, and so did the commentators, okay? 467 00:38:59.400 --> 00:39:05.000 Why? Because consumer prices rose very little during that time, by two or three percent per year. 468 00:39:05.000 --> 00:39:10.100 So everyone was telling us that, well, it looks like, again, we've banished recessions, okay? 469 00:39:10.100 --> 00:39:14.200 The economy is in for a soft landing. 470 00:39:14.200 --> 00:39:18.500 Now, once the economists begin talking like that, we are in for a major recession, okay? 471 00:39:18.500 --> 00:39:21.000 And they're starting to talk like that again. 472 00:39:21.000 --> 00:39:28.840 The stock market from 1982 to 1987 increased by 214 percent, tripled in value, the stock market. 473 00:39:28.840 --> 00:39:35.200 And the U.S. versus the yen, the U.S. dollar lost about 77 percent of its value against the yen, 474 00:39:35.200 --> 00:39:37.560 where the price of the yen went up by 77 percent. 475 00:39:37.560 --> 00:39:46.080 Okay, in any case, what happened, the Fed began to be frightened by what was occurring with the dollar losing its value in 1986. 476 00:39:46.080 --> 00:39:50.720 It slammed on the monetary breaks, it stopped increasing the money supply for a few months, 477 00:39:50.720 --> 00:39:53.960 And then by October, we had the stock market crash, okay? 478 00:39:53.960 --> 00:39:57.840 Interest rates shot up, price of capital goods fell, 479 00:39:57.840 --> 00:40:01.240 and we had the stock market crashing. 480 00:40:01.240 --> 00:40:03.640 Now, I want to toot my own horn here for a moment. 481 00:40:03.640 --> 00:40:09.120 I was the only one that I know that predicted this... 482 00:40:09.120 --> 00:40:13.680 Well, actually, after the crash then, the government was fearful that the whole financial system would collapse. 483 00:40:13.680 --> 00:40:18.880 So they began to inject new money into the economy again in 88 and 89. 484 00:40:18.880 --> 00:40:22.080 and that postponed the recession for a while. 485 00:40:22.080 --> 00:40:24.080 So then economists began to feel good again. 486 00:40:24.080 --> 00:40:27.520 They began to say, well, you know, generally when we have a recession, 487 00:40:27.520 --> 00:40:30.160 we have, generally when we have a stock market crash, 488 00:40:30.160 --> 00:40:32.080 we have a recession six months later. 489 00:40:32.080 --> 00:40:33.680 That hasn't happened. 490 00:40:33.680 --> 00:40:37.440 So the stock market crash was a speculative bubble or something. 491 00:40:37.440 --> 00:40:40.320 It really has no bearing on real economic activity. 492 00:40:40.320 --> 00:40:44.080 And that's when we began to get talk of a soft landing. 493 00:40:44.080 --> 00:40:47.280 Now, of course, we had a very deep and grinding recession 494 00:40:47.280 --> 00:40:53.280 in 1990 to 1991, it actually I think carried on longer, and it was responsible for Bush losing the election. 495 00:40:53.280 --> 00:41:05.280 But I had written an article in 1988 in which I went against the consensus, based on Austrian theory, 496 00:41:05.280 --> 00:41:09.280 let me just read you the conclusion of this, it appeared in the Baltimore Business Review, 497 00:41:09.280 --> 00:41:15.280 this is when everyone was denying that a recession was anywhere in sight, September of 1988, 498 00:41:15.280 --> 00:41:30.280 Based on Austrian cycle theory, my summary outlook for the US economy for the next year therefore includes accelerating price inflation, coinciding with rising interest rates and declining dollar during the first two or three quarters of 1989. 499 00:41:30.280 --> 00:41:44.280 While these trends of interest rates and exchange rates may be temporarily interrupted by well publicized and coordinated attempts by the US and foreign governments to support the dollar on currency markets, the Fed will be compelled to substantially tighten monetary policy before the end of the year. 500 00:41:44.280 --> 00:41:57.280 This will usher in a recession in late 1989 or early 1990, which should strike the U.S. economy with a particularly heavy impact on the thrift and banking industries, and we got that. 501 00:41:57.280 --> 00:42:05.280 Now, an Austrian economist would deny that you can predict the timing, and I hold to that. I still did. 502 00:42:05.280 --> 00:42:21.280 The key is that we know the broad trends, the theory allows us to predict that when there's been a massive increase in the money supply, there will in fact, at some point, which cannot be avoided, can be postponed but not avoided, at some point there will be a recession. 503 00:42:21.280 --> 00:42:27.920 and this is what's occurring now in the 1990s let me just give you some 504 00:42:27.920 --> 00:42:36.320 figures again to show we reveal to you the dimensions of the inflation that 505 00:42:36.320 --> 00:42:43.000 we've had to get us out of out of out of the recession and to save Bush's job we 506 00:42:43.000 --> 00:42:49.120 began to get an inflation in 1991 let me give you an idea of how much money was 507 00:42:49.120 --> 00:43:03.120 In the last quarter of 1990, or actually at the beginning of 1991, the money supply, as I would define it, and Murray Rothbard also has a true money supply, stood at about $2 trillion, just about $2 trillion. 508 00:43:03.120 --> 00:43:14.120 Three years later, it stood at $2 trillion 671 billion. In other words, in three years, the Fed created $674 billion new dollars. 509 00:43:14.120 --> 00:43:20.120 The increase in money supply by 33% or 11% per year, which is a very rapid rate. 510 00:43:20.120 --> 00:43:27.120 If you take a more conventional definition of the money supply, M1, the rate was 36% or 12% per year. 511 00:43:27.120 --> 00:43:36.120 The Fed, in this case, increased the money supply by approximately $300 billion. 512 00:43:36.120 --> 00:43:46.600 Okay, now what happened? Interest rates, at the end of 1990, the Fed funds rate was 8.25, by 1994, the first month, January, it was down to 3%. 513 00:43:46.600 --> 00:43:50.480 Short-term interest rates were pushed down precipitously. 514 00:43:50.480 --> 00:43:55.440 Commercial paper rates fell from almost 8% to 3.2%. 515 00:43:55.440 --> 00:43:57.440 So a boom was set off here. 516 00:43:57.440 --> 00:44:01.080 Now, it was not manifested in rising prices. 517 00:44:01.080 --> 00:44:04.960 One of the reasons is that Japan and Western Europe were still in recession. 518 00:44:04.960 --> 00:44:07.880 So the demand for commodities wasn't very great. 519 00:44:07.880 --> 00:44:17.320 So the consumer, the CPI rose only by 4% in 1991, 3% in 92, 3% in 93, and in the last two years by 2.9% or so. 520 00:44:17.320 --> 00:44:25.400 Which led economists to believe that the inflationary dragon had been slain by the Fed. 521 00:44:25.400 --> 00:44:28.080 But yet, we had an investment boom. 522 00:44:28.080 --> 00:44:34.160 Investment has been increasing from 91 through 95 by about 12% per year. 523 00:44:34.160 --> 00:44:50.720 and Dow Jones shot up in 92, 93, then it paused more or less in 94, didn't go up or down, and then it's begun to take off again, it's up 40% in the last year. 524 00:44:50.720 --> 00:45:03.560 I submit, however, that this is all now about to come to an end, I think the Fed realizes this, they think now that we're on the verge of a recession. 525 00:45:03.560 --> 00:45:08.440 Remember, the Fed does not want pressure from an incumbent president. 526 00:45:08.440 --> 00:45:13.680 If it doesn't give in and try to inflate us out of this impending recession, 527 00:45:13.680 --> 00:45:17.080 what you're going to find happening is that very bitter Democrats in Congress 528 00:45:17.080 --> 00:45:19.720 will begin threatening to take away the independence of the Fed. 529 00:45:19.720 --> 00:45:25.200 That's exactly what happened in 1992 when George Bush was on his way to defeat. 530 00:45:25.200 --> 00:45:29.400 The Republicans in the Congress went about saying things like, 531 00:45:29.400 --> 00:45:37.480 Well, Congress created the Fed, Congress can abolish the Fed or can change the act so that the Fed is more responsive to Congress. 532 00:45:37.480 --> 00:45:41.120 Plus, as I mentioned before, Alan Greenspan is coming up for re-election. 533 00:45:41.120 --> 00:45:44.680 So what I see then is more inflation. 534 00:45:44.680 --> 00:45:51.440 However, the inflation may be too little and too late and we may still get a recession in the election year, 535 00:45:51.440 --> 00:45:54.640 in which case Clinton would really be doomed, 536 00:45:54.640 --> 00:46:00.040 have been undertaken in the last five years to occur quickly, to get that out of the way. 537 00:46:00.040 --> 00:46:02.400 Certainly that leads to a healthier economy. 538 00:46:02.400 --> 00:46:05.960 It also, again, would lead, I think, to a better political regime. 539 00:46:05.960 --> 00:46:12.000 If Clinton lost as a result, or it helped him lose, that is the recession. 540 00:46:12.000 --> 00:46:15.560 One last point I want to make, and then I'll take some questions, 541 00:46:15.560 --> 00:46:21.600 and that is, one of the most nonsensical statements that is made in the press, 542 00:46:21.600 --> 00:46:27.520 in the financial press is that the Fed is an inflation fighter, okay? 543 00:46:27.520 --> 00:46:32.320 The Fed is the only institution legally permitted to create new money. 544 00:46:32.320 --> 00:46:37.440 The Fed is the cause of inflation. It doesn't fight inflation. That's ridiculous. 545 00:46:37.440 --> 00:46:41.800 In fact, if we just take a broad view, 546 00:46:41.800 --> 00:46:48.200 if we look at one of the conventional figures for the money supply, M1, 547 00:46:48.200 --> 00:46:55.640 We had $26 billion in our money supply, $26 billion in 1929, okay? 548 00:46:55.640 --> 00:47:07.520 At the end of 1995, M1 stood at $1,124 billion, okay? 549 00:47:07.520 --> 00:47:10.160 That's a massive, massive increase. Where did that money come from? 550 00:47:10.160 --> 00:47:13.160 If not from the Fed. Certainly it came from the Fed, okay? 551 00:47:13.160 --> 00:47:16.720 And that certainly has driven up prices from 1929 to today. 552 00:47:16.720 --> 00:47:22.760 Even since 1971, when President Nixon cut the last vestige of the gold standard, 553 00:47:22.760 --> 00:47:26.440 or removed the last vestige of the gold standard by closing the window, 554 00:47:26.440 --> 00:47:31.480 not allowing foreign governments and central banks to convert their dollars for gold. 555 00:47:31.480 --> 00:47:39.200 Since that point, the Fed has created 896 billion new dollars. 556 00:47:39.200 --> 00:47:44.600 The money supply has increased from that, from relatively recent past, 24 years ago, 557 00:47:44.600 --> 00:47:51.320 by 393 percent. In other words, it's quintupled. The money supply is quintupled in 24 years. 558 00:47:53.080 --> 00:47:57.960 Now compare that to the 19th century, to the gold standard. We had very slow increase in gold, 559 00:47:57.960 --> 00:48:04.200 and in fact, the increase in the output of goods and services outstripped the increase in gold, 560 00:48:04.200 --> 00:48:09.640 so that prices in 1896 were lower than prices in 1834, the year the United States were on the 561 00:48:09.640 --> 00:48:10.920 and the gold standard. 562 00:48:10.920 --> 00:48:15.920 By 1913, prices were just about what they were in 1834. 563 00:48:15.960 --> 00:48:20.120 And people called the period from 1896 to 1914, 564 00:48:20.120 --> 00:48:23.080 when the Fed was established, a great inflation. 565 00:48:23.080 --> 00:48:24.640 Now, you know why they did that? 566 00:48:24.640 --> 00:48:26.880 They called it that because we had an inflation rate 567 00:48:26.880 --> 00:48:30.220 of 13% over 18 years. 568 00:48:30.220 --> 00:48:32.320 Prices went up by less than 1% per year. 569 00:48:32.320 --> 00:48:34.380 And for people who were used to the gold standard, 570 00:48:34.380 --> 00:48:36.480 this was a massive inflation. 571 00:48:36.480 --> 00:48:40.800 Okay, now we have, in the US, certainly in the early 80s during the court administration, 572 00:48:40.800 --> 00:48:46.520 we had 16-17% per year, okay, never mind over 18 years. 573 00:48:46.520 --> 00:48:52.760 So now we're down to 3% per year, people are saying we've defeated inflation. 574 00:48:52.760 --> 00:48:58.400 Well, I guess I'll conclude by pointing out that really the only school of thought 575 00:48:58.400 --> 00:49:04.520 that consistently propounds the truth about inflation is the Austrian School, okay. 576 00:49:04.520 --> 00:49:16.220 And the Austrian School is very, very tied to the Mises Institute in that the Mises Institute gives Austrian scholars the wherewithal to pursue research into this important topic. 577 00:49:16.220 --> 00:49:23.720 We all of us face right now the specter of the comeback of Keynesian economics on the world level. 578 00:49:23.720 --> 00:49:30.620 Now, what they've been looking for since the early 1940s is a world money, a one world money. 579 00:49:30.620 --> 00:49:35.140 With a world money, there would be no barriers left against hyperinflation. 580 00:49:35.140 --> 00:49:43.180 So, what I would urge you to do is to begin to read the works of the Austrian School, 581 00:49:43.180 --> 00:49:47.860 spread the word among all your colleagues and friends, and... 582 00:49:52.700 --> 00:49:55.780 Well, I'm just going to go in there and take questions. 583 00:49:55.780 --> 00:50:10.980 Okay, you have to keep in mind that prices are determined both by the supply of and the demand for money. 584 00:50:10.980 --> 00:50:14.780 Occasionally the demand for money will go up. People want to hold more money. 585 00:50:14.780 --> 00:50:23.380 So even if there's new money coming into the economy, people will hold more maybe because of expectations about future falls and prices. 586 00:50:23.380 --> 00:50:28.380 Also, if the supply of goods and services increase, remember, when we talked about that, 587 00:50:28.380 --> 00:50:33.380 as they continually do in a free market economy, you're going to get new money coming into the economy, 588 00:50:33.380 --> 00:50:37.380 being met by increases of supplies of goods and services. 589 00:50:37.380 --> 00:50:43.380 So that's why you can't assume that because we don't see prices rising over any given period, 590 00:50:43.380 --> 00:50:47.380 there is no inflation. You must look at the money supply figures. Yes? 591 00:50:53.380 --> 00:50:58.380 Right, that's a good point. 592 00:50:58.380 --> 00:51:03.380 Yes. 593 00:51:03.380 --> 00:51:08.380 Yes. 594 00:51:08.380 --> 00:51:13.380 Right. 595 00:51:13.380 --> 00:51:18.380 Yeah. 596 00:51:18.380 --> 00:51:25.380 If I tried to get across any lesson, it's that inflation is a multi-dimensional process. 597 00:51:25.380 --> 00:51:30.380 We've had a massive inflation in the stock market in the last five years. 598 00:51:48.380 --> 00:51:54.380 In your book, that's the vast majority of monetary transactions today. 599 00:51:54.380 --> 00:51:57.380 We can comment on that. 600 00:51:57.380 --> 00:52:01.380 It's not the surrogate money that we're really dealing with, it's the modified money. 601 00:52:18.380 --> 00:52:31.380 and when the Fed creates new reserves, for example, let's say your bank wants a loan, for whatever reason, let's say your bank wants to go to the Fed and ask for a $50 million loan. 602 00:52:31.380 --> 00:52:38.380 Well, they get the loan and they lend that $50 million out and then that can be multiplied 10 times. Now, where does the loan come from? 603 00:52:38.380 --> 00:52:53.380 All the Fed does is go into the computer, find the T-account for your particular bank and just type in plus $50 million and then it calls up your bank at the end of the day and says you can now loan out $50 million more. That's the way it's done. 604 00:52:53.380 --> 00:53:07.380 Also, by the way, 70% of U.S. currency by some accounts is not in the United States. It's financing underground economy transactions including drug transactions throughout the world. Yes? 605 00:53:07.380 --> 00:53:35.880 If you pay your bank loan back, then the bank has those reserves to loan out to someone else. 606 00:53:35.880 --> 00:53:39.880 So unless the Fed destroys those reserves, and they can do that, and they do that too. 607 00:53:39.880 --> 00:53:41.880 They can just take it out of the computer. 608 00:53:41.880 --> 00:53:45.780 Then your bank has to call in loans, and the whole money supply decreases. 609 00:53:45.780 --> 00:53:48.680 Now that's been happening in the last two years. I didn't mention, I meant to mention it, that 610 00:53:48.680 --> 00:53:52.380 money supplies actually decreased slightly in the last two years. 611 00:53:52.380 --> 00:53:58.580 So that's why I think the prospects for recession fairly soon are good. 612 00:53:58.580 --> 00:53:59.580 Yes? 613 00:53:59.580 --> 00:54:04.580 What about the money market fund? Does that possibly multiply with that money? 614 00:54:29.580 --> 00:54:30.580 Mutual Funds. 615 00:54:30.580 --> 00:54:35.540 All it is, if you write out a check on a money market fund, it's simply like writing a note 616 00:54:35.540 --> 00:54:40.180 to your broker, telling him to sell certain stock and send the check to you or someone 617 00:54:40.180 --> 00:54:41.660 else that you name in the note. 618 00:54:41.660 --> 00:54:43.820 That's what the Money Market Mutual Fund does. 619 00:54:43.820 --> 00:54:49.100 In order to pay you back, they have to sell some of the certificates of deposit, some 620 00:54:49.100 --> 00:54:52.340 of the commercial paper that they own, and when you write out a check, you're just telling 621 00:54:52.340 --> 00:54:56.700 them to take the proceeds of that sale and send it to someone else. 622 00:54:56.700 --> 00:54:57.700 So they're good guys. 623 00:54:57.700 --> 00:54:58.700 They're not fractional reserve banks. 624 00:54:58.700 --> 00:55:05.700 In fact, I've argued that on a totally free market, fractional reserve banking would collapse, 625 00:55:05.700 --> 00:55:12.700 and you get these types of institutions as ways that people can have quick access to their money, yet still earn interest. 626 00:55:12.700 --> 00:55:30.620 But if we have some sort of stack inflationary recession, and I had $100,000, you know, 627 00:55:30.620 --> 00:55:36.720 see, that's tough. Inflation, you know, if it's rapid enough, you might want to hedge by going into gold. 628 00:55:36.720 --> 00:55:47.320 But an inflationary recession, maybe consumer goods companies, they don't do terribly in recessions, like Sears and Kmart and so on. 629 00:55:47.320 --> 00:55:51.240 They do all right during a recession compared to Bethlehem Steel. 630 00:55:51.240 --> 00:55:54.480 So you want to stay away, in a recession, you want to stay away from the capital goods industries. 631 00:55:54.480 --> 00:55:59.560 You want to stay away from mining stocks, you want to stay away from steel and so on. 632 00:55:59.560 --> 00:56:05.560 I mean, I wouldn't pick particular companies, but absolutely, yeah, it's tough. 633 00:56:05.560 --> 00:56:09.560 You see, with inflation, you get two things going at once. 634 00:56:12.560 --> 00:56:15.560 Yeah, but then you have to be careful. 635 00:56:15.560 --> 00:56:20.560 I mean, yeah, the Swiss franc is probably a harder currency now than the U.S. dollar. 636 00:56:20.560 --> 00:56:23.560 Yeah, yeah. 637 00:56:23.560 --> 00:56:25.560 Any more? Or that's it? 638 00:56:25.560 --> 00:56:27.560 Okay, thank you. 639 00:56:29.560 --> 00:56:31.560 Thank you very much.