WEBVTT NOTE Skyscrapers and Business Cycles 1 00:00:00.000 --> 00:00:04.560 Well, this afternoon, our distinguished guest speaker is Dr. Mark Thornton. 2 00:00:04.560 --> 00:00:08.000 He's a professor of economics at the Mises Institute. 3 00:00:09.520 --> 00:00:16.640 Mark is the author of four books, including a very thought provoking book on the economics of 4 00:00:16.640 --> 00:00:22.720 prohibition. Dr. Thornton is also very well known for his seminal works on skyscrapers 5 00:00:22.720 --> 00:00:28.720 and Business Cycles, and frequently appears on many mainstream news programs to discuss 6 00:00:28.720 --> 00:00:32.800 the thesis. 7 00:00:32.800 --> 00:00:38.240 So without further delay, Dr. Mark Thornton, welcome to Finance 550. 8 00:00:38.240 --> 00:00:41.680 We're excited to have you here today. 9 00:00:41.680 --> 00:00:42.680 Thank you very much. 10 00:00:42.680 --> 00:00:47.520 Today we're going to be talking about skyscrapers and business cycles. 11 00:00:47.520 --> 00:00:50.680 Before I actually get into the model and that sort of thing, I want to give you sort of 12 00:00:50.680 --> 00:00:55.120 I'm going to give you some of the background to the development of the skyscraper index 13 00:00:55.120 --> 00:00:57.440 and the skyscraper model. 14 00:00:57.440 --> 00:01:01.900 It's a very unconventional approach in economics. 15 00:01:01.900 --> 00:01:08.640 It's a very different, outside the box approach, but yet very successful as well. 16 00:01:08.640 --> 00:01:13.520 So I'm going to give you some of the background as to how I came upon it and how it developed 17 00:01:13.520 --> 00:01:17.000 in my own life and my own way of thinking. 18 00:01:17.000 --> 00:01:23.880 I grew up in the 1970s when the United States economy was suffering from a severe stagflation 19 00:01:23.880 --> 00:01:31.220 which was a stagnating economy with high rates of inflation, high rates of unemployment. 20 00:01:31.220 --> 00:01:36.860 Nobody seemed to have the right answers and so that was one of the things that I was always 21 00:01:36.860 --> 00:01:41.220 looking at in my life around me. 22 00:01:41.220 --> 00:01:46.100 And I came across the Austrian School of Economics. 23 00:01:46.100 --> 00:01:51.780 In high school a little bit but in college as well and one of the most important influences 24 00:01:51.780 --> 00:01:57.820 I think on my economic thinking was reading Murray Rothbard's book America's Great Depression 25 00:01:57.820 --> 00:02:03.820 where Murray explained what was the real cause of the Great Depression of the 1930s and he 26 00:02:03.820 --> 00:02:13.780 really reinvented the perspective of the Great Depression and what it was all about. In college 27 00:02:13.780 --> 00:02:20.940 I took a special class on Ludwig von Mises' Theory of Money and Credit and that was a 28 00:02:20.940 --> 00:02:27.980 special course, independent readings course of Mises' first great book where he really 29 00:02:27.980 --> 00:02:35.380 showed what money is and what banking is and how problems and government intervention in 30 00:02:35.380 --> 00:02:42.380 banking can cause distortions in the overall economy which can result in a business cycle. 31 00:02:42.380 --> 00:02:47.360 Also during the 1970s, F. A. Hayek, who was a student of Mises, was awarded the Nobel 32 00:02:47.360 --> 00:02:53.400 Prize in Economics for his business cycle theory, the Austrian business cycle theory. 33 00:02:53.400 --> 00:03:00.160 So that was something that really captivated my attention as far as intellectual interest. 34 00:03:00.160 --> 00:03:08.980 And so as I graduated from college, I decided to go to graduate school primarily to study 35 00:03:08.980 --> 00:03:13.660 the Austrian Theory, the Business Cycle, because I thought that that would be really the key 36 00:03:13.660 --> 00:03:22.300 to solving the problems in the American economy. Things were still very bad and there was really 37 00:03:22.300 --> 00:03:28.420 an economic depression in the United States in 1980 through 1982, which was another reason 38 00:03:28.420 --> 00:03:33.580 I went to graduate school because there were no jobs basically. But when I got to graduate 39 00:03:33.580 --> 00:03:38.880 school, I picked the school that I thought I'd get the most Austrian economics at. When 40 00:03:38.880 --> 00:03:43.640 When I got here, I was told by one of my major professors in macroeconomics that the Austrian 41 00:03:43.640 --> 00:03:48.600 theory of the business cycle was a grisly embarrassment. 42 00:03:48.600 --> 00:03:54.520 And so I was very much discouraged in pursuing Austrian economics, and I was told that the 43 00:03:54.520 --> 00:04:02.620 Austrian school was merely an historical fact, that there were very few Austrians left. 44 00:04:02.620 --> 00:04:07.120 They were all teaching at universities that didn't have PhD programs, and so there would 45 00:04:37.120 --> 00:04:45.720 Office, and I got a job at Columbus State College and University, but it was in a position 46 00:04:45.720 --> 00:04:46.720 in macroeconomics. 47 00:04:46.720 --> 00:04:52.960 There was the position in microeconomics and macroeconomics, so all of a sudden, if I wanted 48 00:04:52.960 --> 00:04:58.320 that job, I was going to have to change what my research was all about, and it was at that 49 00:04:58.320 --> 00:05:05.840 same time that I came across, very fortunately, Richard Cantillon. 50 00:05:05.840 --> 00:05:10.880 Murray Rothbard had sort of turned me on to Richard Cantillon, who was the first economic 51 00:05:10.880 --> 00:05:18.160 theorist. And so it was that 1999 period when I was turning towards macroeconomics. I was 52 00:05:18.160 --> 00:05:27.520 turning towards the economics of Richard Cantillon. And it's also the time when I first came across 53 00:05:27.520 --> 00:05:34.680 an article about the skyscraper index. So as a result of that rather drastic change 54 00:05:34.680 --> 00:05:43.440 In my career, I started a series of articles about major economic crises in the United 55 00:05:43.440 --> 00:05:49.080 States and around the world. And basically what I was looking at is who saw these things 56 00:05:49.080 --> 00:05:58.240 coming and who was more or less oblivious to the looming economic crises in the economy. 57 00:05:58.240 --> 00:06:03.280 The first was, of course, America's Great Depression. And what I found was that Ludwig 58 00:06:03.280 --> 00:06:10.600 Ludwig von Mises had written a book in 1928, The Cause of the Economic Crisis, where he 59 00:06:10.600 --> 00:06:20.740 basically laid out a whole theory as to why the type of system that we had which was controlled 60 00:06:20.740 --> 00:06:28.640 by a central bank and a central bank who was operating monetary policy based on looking 61 00:06:28.640 --> 00:06:34.360 Working at the price level in the economy, trying to keep the value of the dollar stable. 62 00:06:34.360 --> 00:06:40.320 And so he saw that as the cause. Irving Fisher, who was the great American economist and basically 63 00:06:40.320 --> 00:06:48.440 who created macroeconomics, was the inventor of monetary policies run by a central bank 64 00:06:48.440 --> 00:06:53.920 guided by the price index. And he thought that if we could keep the value of dollars 65 00:06:53.920 --> 00:06:59.160 Stable in terms of purchasing power, then we wouldn't have anything to worry about. 66 00:06:59.160 --> 00:07:06.780 And so while Mises was calling and warning of an economic crisis on the eve of the Great 67 00:07:06.780 --> 00:07:14.320 Depression, Irving Fisher was telling us that we had reached a new era of perpetual prosperity. 68 00:07:14.320 --> 00:07:19.720 I saw the same thing when I looked into the great stagflation of the 1970s. 69 00:07:19.720 --> 00:07:24.400 The Keynesian economist Arthur Oaken, who was the chairman of the President's Council 70 00:07:24.400 --> 00:07:32.240 of Economic Advisers, wrote a book that was published the same month the economic crisis 71 00:07:32.240 --> 00:07:37.400 of the 1970s started, where he said that the business cycle was a thing of the past and 72 00:07:37.400 --> 00:07:43.280 that Keynesian approaches to managing the economy would prevent any type of economic 73 00:07:43.280 --> 00:07:44.280 collapse. 74 00:07:44.280 --> 00:08:01.280 It was at the same time that Murray Rothbard published his small pamphlet on what causes business cycles where he was reiterating what he had written in his book, America's Great Depression, and reiterating what he had learned from Ludwig von Mises, who was his teacher. 75 00:08:01.280 --> 00:08:09.560 I saw the same thing with the Japanese bubble of 1990. The mainstream economists were saying 76 00:08:09.560 --> 00:08:17.660 that the Japanese system was the way to go. The Nikkei stock index had reached 36,000. 77 00:08:17.660 --> 00:08:25.640 It looked to mainstream economists that Japan was going to take over the world by dominating 78 00:08:25.640 --> 00:08:27.400 in the Economy. 79 00:08:27.400 --> 00:08:33.320 And then there was the technology bubble of the late 1990s and, of course, the meltdown 80 00:08:33.320 --> 00:08:38.640 in the NASDAQ stock market beginning in the year 2000. 81 00:08:38.640 --> 00:08:43.960 And here we have a case where we have a lot more economists involved in the picture. 82 00:08:43.960 --> 00:08:51.040 We had several Austrian economists warning throughout 1999 that we were in a bubble, 83 00:08:51.040 --> 00:08:56.160 It was going to crash and that there would be, you know, significant consequences as 84 00:08:56.160 --> 00:09:01.120 a result of that. At the same time, of course, mainstream economists were saying no, we were 85 00:09:01.120 --> 00:09:07.400 in a new era, Alan Greenspan was in charge, we didn't have anything to worry about, books 86 00:09:07.400 --> 00:09:16.060 were appearing from mainstream economists, the Dow Jones was over 10,000, but the first 87 00:09:16.060 --> 00:09:46.060 The first book predicted that the Dow Jones would go to $36,000 and then a couple of months later a book came out that said no, the Dow Jones was going to go to $60,000 and just before the crash took place an economist named Ralph Acampura came out with a book called Dow 100,000 and so it again is a case of Austrian economists knowing exactly what was going on, knowing exactly what the cause was, of course you don't 88 00:09:46.060 --> 00:09:53.020 the timing and the magnitude, but they knew of what was coming and the mainstream economists 89 00:09:53.020 --> 00:09:57.620 were completely oblivious. They thought that they had learned how to control the economy 90 00:09:57.620 --> 00:10:03.700 and create perpetual high rates of prosperity. And then the housing bubble, of course, that 91 00:10:03.700 --> 00:10:10.460 were going through the crisis phase of the housing bubble, Austrians started writing 92 00:10:10.460 --> 00:10:21.940 about the housing bubble as early as 2003. I began writing about it in 2004, 2005, 2006, 93 00:10:21.940 --> 00:10:28.620 and basically explaining what was the cause, which was artificially low interest rates 94 00:10:28.620 --> 00:10:37.780 by the Fed, a misallocation of resources, malinvestments, while the mainstream economists 95 00:10:37.780 --> 00:10:47.780 The Fed is managing policy just perfectly. We have low rates of inflation. Everything is great. 96 00:10:47.780 --> 00:10:54.780 Ben Bernanke was telling us that mortgage lending standards were the best that they had ever been. 97 00:10:54.780 --> 00:11:04.780 And the Fed was telling us that all these asset-backed securities, derivatives, collateralized debt obligations, 98 00:11:04.780 --> 00:11:29.780 The New Era Phenomenon 99 00:11:29.780 --> 00:11:36.180 I'm sure some of you heard this where you were told that housing prices never go down, 100 00:11:36.180 --> 00:11:42.460 that nobody ever loses money in housing, and where people without any experience at all 101 00:11:42.460 --> 00:11:46.420 were flipping houses and making money. 102 00:11:46.420 --> 00:11:53.820 It's just those kind of things that are symptomatic of significant boom bust cycles in the American 103 00:11:53.820 --> 00:11:54.820 economy. 104 00:11:54.820 --> 00:12:05.020 I mentioned Cantillon earlier. He's going to be important to the overall study of skyscrapers 105 00:12:05.020 --> 00:12:15.300 and why they are so useful at helping us predict significant economic crises. Richard Cantillon 106 00:12:15.300 --> 00:12:23.420 was a banker and a very clever banker. He was on the staff of the Mississippi Company 107 00:12:23.420 --> 00:12:33.300 during the Mississippi bubble of 1720 and the shares in this company increased by you 108 00:12:33.300 --> 00:12:39.220 know several thousand percent during the bubble and Cantillon was famous for not just making 109 00:12:39.220 --> 00:12:49.620 money during that bubble but he also sold his shares near the top and shorted the shares 110 00:12:49.620 --> 00:12:56.820 and also invested in such a way as to take advantage of the looming change in currency 111 00:12:56.820 --> 00:13:05.060 exchange rates and so he made really three large fortunes during this time and was able 112 00:13:05.060 --> 00:13:13.060 to write a book following this which laid out systematically an economic theory of how 113 00:13:13.060 --> 00:13:19.300 The Market Economy worked and he was really the teacher of all the famous, early famous 114 00:13:19.300 --> 00:13:20.300 economists. 115 00:13:20.300 --> 00:13:29.900 He was referenced by Adam Smith, David Hume read his manuscript, Jean-Baptiste Say, Turgot, 116 00:13:29.900 --> 00:13:38.080 Kondiak, all the famous early economists basically got their economics from this guy. 117 00:13:38.080 --> 00:13:47.400 He was rich, he was smart, and it's always, I think, a good idea to intensely study people 118 00:13:47.400 --> 00:13:55.880 who know what they're doing, are creative intellectually, and also use that knowledge 119 00:13:55.880 --> 00:13:59.960 to make money and to understand how the economy works. 120 00:13:59.960 --> 00:14:00.960 So I was reading Cantillon. 121 00:14:00.960 --> 00:14:08.320 And then I took a sabbatical in the year 2003, and I was only teaching one course, and it 122 00:14:08.320 --> 00:14:14.120 was at that point that I decided that I was going to work on this skyscraper thing, linking 123 00:14:14.120 --> 00:14:18.520 it with Cantillon. 124 00:14:18.520 --> 00:14:27.760 When I first saw the skyscraper index in the business press, most of the stories basically 125 00:14:27.760 --> 00:14:33.800 just regarded the success of the index and linked it with things like the January effect 126 00:14:33.800 --> 00:14:41.040 and the Christmas rallies and the use of the winner of the Super Bowl to determine if the 127 00:14:41.040 --> 00:14:46.960 market was going to go up or down. In other words, they regarded the skyscraper index 128 00:14:46.960 --> 00:14:55.960 as just a mere coincidence and not really valuable for telling us much about the economy. 129 00:14:55.960 --> 00:14:59.980 And I saw it differently because I had been reading Cantillon and I realized that there 130 00:14:59.980 --> 00:15:09.880 was an economic connection with these skyscrapers because, of course, business cycles are all 131 00:15:09.880 --> 00:15:15.160 about real estate and construction and things of that nature as well as interest rates and 132 00:15:15.160 --> 00:15:18.220 that's what Cantillon was writing about as well. 133 00:15:18.220 --> 00:15:24.040 The article, Skyscrapers and Business Cycles, was published in the spring of 2005. 134 00:15:24.040 --> 00:15:31.160 It took about two years, which is not uncommon, to actually get it into print and it's published 135 00:15:31.160 --> 00:15:36.840 in the quarterly journal of Austrian Economics and I guess most of you have a copy of that. 136 00:15:36.840 --> 00:15:46.600 Now in late 2007 a crisis signal was given by that model and basically the model says 137 00:15:46.600 --> 00:15:55.320 says that whenever a new record is set in terms of the height of skyscrapers, that that is 138 00:15:55.320 --> 00:16:05.180 a signal of a looming economic crisis. And so basically it gave a signal at that time 139 00:16:05.180 --> 00:16:11.560 that there was a global economic crisis coming. Three months later the crisis began. One of 140 00:16:11.560 --> 00:16:17.760 One of the first signs was that the mortgage originator started going out of business. 141 00:16:17.760 --> 00:16:25.920 About six months later, the Fed started unleashing its monetary weapons of mass stimulation. 142 00:16:25.920 --> 00:16:35.240 About January of 2008, one new unprecedented type of intervention after another and of 143 00:16:35.240 --> 00:16:43.760 and of course of massive amounts that were at one time unbelievable. 144 00:16:43.760 --> 00:16:49.440 So this model of skyscrapers and business cycles, first of all the paper shows that 145 00:16:49.440 --> 00:16:57.640 there is a coincidence between new record-setting skyscrapers and global economic crises. 146 00:16:57.640 --> 00:17:04.840 In the coincidence that originally appeared, I did more historical research to show that 147 00:17:04.840 --> 00:17:11.020 Some of the exceptions that occurred in terms of there not being a crisis associated with 148 00:17:11.020 --> 00:17:15.760 a new record was actually misplaced. 149 00:17:15.760 --> 00:17:20.800 So these new record-setting skyscrapers are started during a boom. 150 00:17:20.800 --> 00:17:28.560 And usually the boom is of a significant length and a significant depth in terms of the stock 151 00:17:28.560 --> 00:17:31.680 market, the economy, jobs and so forth. 152 00:17:31.680 --> 00:17:37.880 There's a long period of high economic growth and that's when these record-setting skyscrapers 153 00:17:37.880 --> 00:17:40.360 are first started. 154 00:17:40.360 --> 00:17:46.680 The records are actually set in terms of the height of these buildings near the top in 155 00:17:46.680 --> 00:17:57.000 the boom phase of the business cycle, the crisis sets in, the bust occurs in the economy 156 00:17:57.000 --> 00:18:03.360 And that's about the time that these record setting skyscrapers are completed and opened 157 00:18:03.360 --> 00:18:06.160 to the public. 158 00:18:06.160 --> 00:18:13.520 Now what I basically propose is that the Austrian theory, the business cycle, explains both 159 00:18:13.520 --> 00:18:18.040 business cycles and these record setting skyscrapers. 160 00:18:18.040 --> 00:18:25.840 And the simple recipe here is that the Fed creates conditions of easy credit, so they're 161 00:18:25.840 --> 00:18:32.740 increasing the money supply to banks, banks are making more loans, the interest rates 162 00:18:32.740 --> 00:18:42.360 are artificially low and credit standards are diminished. If the Fed creates more credit 163 00:18:42.360 --> 00:18:48.680 then you basically have to reduce your credit standards in order to inject all that new 164 00:18:48.680 --> 00:18:55.220 credit into the market. You have to have less reliable borrowers essentially. And this is 165 00:18:55.220 --> 00:18:59.540 This is where the cluster of errors takes place. 166 00:18:59.540 --> 00:19:03.620 That's one of the unique things about the business cycle is all of a sudden all entrepreneurs 167 00:19:03.620 --> 00:19:06.080 are all making mistakes at the same time. 168 00:19:06.080 --> 00:19:09.840 They're making male investments. 169 00:19:09.840 --> 00:19:16.380 So the economy goes into a boom as all of this construction activity takes place. 170 00:19:16.380 --> 00:19:26.500 And then the errors are only revealed as being unprofitable and stupid during the bust. 171 00:19:26.500 --> 00:19:34.940 Now connecting the Austrian theory to the skyscraper index is what I did was I used 172 00:19:34.940 --> 00:19:37.540 what are called Cantillon effects. 173 00:19:37.540 --> 00:19:43.980 And Cantillon showed that when there's a change in the supply or flow of money in the economy, 174 00:19:43.980 --> 00:19:49.040 And it changes the structure of production. So there's an artificial source of new money 175 00:19:49.040 --> 00:19:54.500 that comes into the economy, an artificial source of credit that comes into the economy, 176 00:19:54.500 --> 00:20:03.340 and this causes entrepreneurs to change the structure of production. And this is what 177 00:20:03.340 --> 00:20:11.060 ultimately creates a connection between the skyscraper records and the Austrian theory. 178 00:20:11.060 --> 00:20:22.100 Now let's go through the coincidence of record-setting skyscrapers with the business cycle, and this 179 00:20:22.100 --> 00:20:27.660 is laid out in the paper in both table form and there's also a diagram. 180 00:20:27.660 --> 00:20:34.020 The first is the Panic of 1907, and with this panic, which was significant because this 181 00:20:34.020 --> 00:20:40.600 is what really set the groundwork for establishing the Fed, the Singer Building was started 182 00:20:40.600 --> 00:20:46.320 Before the Panic, the Metropolitan Life Building was started before the panic. Singer was completed 183 00:20:46.320 --> 00:20:53.320 in 1908. Metropolitan Life was completed in 1909. The Singer Building set the record. 184 00:20:55.520 --> 00:21:01.360 The Metropolitan Life Building exceeded that record. 185 00:21:01.360 --> 00:21:08.360 The next new record was the Woolworth Building, also built in New York to a height of 792 186 00:21:08.360 --> 00:21:20.540 792 feet 57 stories and that was associated with no real economic crisis and so that was 187 00:21:20.540 --> 00:21:26.520 considered an exception but when I went back and looked at the historical record the economy 188 00:21:26.520 --> 00:21:32.480 at the time was in very severe straits. 189 00:21:32.480 --> 00:21:38.020 The economy was clearly in a recession and it had experienced one of the worst quarterly 190 00:21:38.020 --> 00:21:42.140 Declines in almost a half a century. 191 00:21:42.140 --> 00:21:47.300 And what happened about a year into this crisis was, of course, you had the establishment 192 00:21:47.300 --> 00:21:49.940 of the Fed in 1913. 193 00:21:49.940 --> 00:21:54.340 They began to inject large amounts of money into the economy. 194 00:21:54.340 --> 00:22:00.180 And then you also had the beginning of World War I, where basically the entire European 195 00:22:00.180 --> 00:22:06.300 continent was at war and they started demanding commodities and food from the United States 196 00:22:06.300 --> 00:22:11.060 And that helped restart, both of those factors helped restart the economy, which otherwise 197 00:22:11.060 --> 00:22:15.460 would have probably gone into a severe economic crisis. 198 00:22:15.460 --> 00:22:20.700 And historians would have called it something, but because of those intervening factors, 199 00:22:20.700 --> 00:22:26.400 there was no huge economic crisis associated with that. 200 00:22:26.400 --> 00:22:34.100 And then we fast forward to the Great Depression, when 40 Wall Street was completed in 1929 201 00:22:34.100 --> 00:22:41.780 927 feet. That's now known, I think, as the Trump Building. The Chrysler Building was 202 00:22:41.780 --> 00:22:49.540 completed in 1930 at 77 stories and over a thousand feet. And then finally we had the 203 00:22:49.540 --> 00:22:58.100 New York State, the Empire State Building completed in 1931 with 102 stories and with 204 00:22:58.100 --> 00:23:05.420 over 1200 feet in height. And of course, all of those were signaled in and began before 205 00:23:05.420 --> 00:23:11.500 the Great Depression and are historically associated with the beginning of the Great 206 00:23:11.500 --> 00:23:16.980 Depression. And then there's a lull. Of course, the Great Depression lasted a long time, including 207 00:23:16.980 --> 00:23:27.300 World War II. And what we see is a boom in the economy in the 1960s. It was called the 208 00:23:27.300 --> 00:23:32.780 and Go-Go 60s at that point. 209 00:23:32.780 --> 00:23:38.820 We had the beginnings of the World Trade Towers in New York and the Sears Building in Chicago 210 00:23:38.820 --> 00:23:44.340 all expected to exceed 100 stories at the end of the 1960s. 211 00:23:44.340 --> 00:23:50.300 The World Trade Towers were completed in 72 and 73 and the Sears Tower broke their record 212 00:23:50.300 --> 00:23:51.300 in 1974. 213 00:23:51.300 --> 00:24:00.580 and, of course, these buildings signaled in the great stagflation of the 1970s, basically 214 00:24:00.580 --> 00:24:10.500 when we had high rates of unemployment, we had high rates of inflation, several recessions, 215 00:24:10.500 --> 00:24:19.940 and the stock market never recovered its real inflation-adjusted value from 1969 until the 216 00:24:19.940 --> 00:24:25.900 In the mid-80s, because we were getting lower stock prices and higher rates of inflation, 217 00:24:25.900 --> 00:24:32.300 so the real value of stocks had fallen a very long way. 218 00:24:32.300 --> 00:24:39.140 And again, we fast-forward to 1997, the completion of the Patronus Towers in Guadalampur. 219 00:24:39.140 --> 00:24:46.780 This set the record in terms of height, in terms of feet, at 1483 feet, and that signaled 220 00:24:46.780 --> 00:25:16.300 Taipei 101 was built in Taipei, China. It was completed in 2001. It set the record and it 221 00:25:16.300 --> 00:25:24.640 signaled in the bubble in tech stocks in the meltdown in the Nasdaq stock market. 222 00:25:24.640 --> 00:25:31.840 And then finally and more recently, we have the Burj Dubai Tower in Dubai, United Arab 223 00:25:31.840 --> 00:25:36.020 Emirates in the Middle East. 224 00:25:36.020 --> 00:25:44.240 The signal for that, they set the record in the second half of 2007 and it was recently 225 00:25:44.240 --> 00:25:55.520 opened to the public January of 2010 at 160 stories and over 2,700 feet and, of course, 226 00:25:55.520 --> 00:26:03.640 the Burj Dubai Tower was a signal about the housing bubble and its ultimate collapse. 227 00:26:03.640 --> 00:26:06.560 So the record there is quite impressive. 228 00:26:06.560 --> 00:26:17.880 I've also gone back in time and looked at other previous 19th century records and they 229 00:26:17.880 --> 00:26:29.440 were also associated with economic panics and economic crisis in the United States. 230 00:26:29.440 --> 00:26:37.880 Some exceptions, so we have the earlier records in the 19th century also confirmed, the skyscraper 231 00:26:37.880 --> 00:26:44.180 index and we've also looked at state level and individual country level records in places 232 00:26:44.180 --> 00:26:48.940 like South America and in various states around the United States and the record there is 233 00:26:48.940 --> 00:26:54.920 also good in terms of new records within those states and within those countries being associated 234 00:26:54.920 --> 00:27:02.200 with Recessions in the Local Economies or in the Economies of Other Countries. 235 00:27:02.200 --> 00:27:10.160 Other crises in the United States include the Depression of 1920-21, the Depression 236 00:27:10.160 --> 00:27:17.220 of 1937-38, and what I would consider a Depression of 1980-1982. 237 00:27:17.220 --> 00:27:24.640 But these were all less severe crises. 238 00:27:24.640 --> 00:27:30.140 They all occurred in ongoing recessions. In other words, in 1920, we were still suffering 239 00:27:30.140 --> 00:27:36.580 the aftermath of World War I. In 1937-38, we were still within the context of the Great 240 00:27:36.580 --> 00:27:46.360 Depression. And in 1980-1982, we had been suffering through economic malaise for more 241 00:27:46.360 --> 00:27:50.520 for more than a decade. 242 00:27:50.520 --> 00:27:57.640 So the components of the model of skyscrapers include the following things. 243 00:27:57.640 --> 00:28:02.320 First we have a period of easy money, easy credit, an economic expansion and a boom in 244 00:28:02.320 --> 00:28:04.400 the stock market. 245 00:28:04.400 --> 00:28:10.360 Then we see capital expenditures increasing and money flowing towards new technologies 246 00:28:10.360 --> 00:28:17.860 and New Industries, and the transformation via technology of existing industries. 247 00:28:17.860 --> 00:28:23.860 This is sometimes referred to as a new era, but in my context it's really the building 248 00:28:23.860 --> 00:28:30.560 of Kantian effects or changing the structure of production on an artificial basis. 249 00:28:30.560 --> 00:28:37.500 You also get highly speculative investments and luxury spending. 250 00:28:37.500 --> 00:28:44.420 This is the period when the skyscrapers of record-setting heights are started, but inevitably 251 00:28:44.420 --> 00:28:51.860 inconsistencies and tensions in resource uses develop in this artificially distorted economy 252 00:28:51.860 --> 00:28:59.980 and this creates some bad news and makes markets begin to turn sour essentially. 253 00:28:59.980 --> 00:29:06.300 Losses are announced by various companies, unemployment picks up and bankruptcies start 254 00:29:06.300 --> 00:29:07.300 to Mount. 255 00:29:07.300 --> 00:29:14.660 And this is where the skyscrapers are completed and open to the public and open for use. 256 00:29:14.660 --> 00:29:20.300 The skyscraper of the 20th century, if you really look at it, has replaced things like 257 00:29:20.300 --> 00:29:27.380 railroads and the factories of earlier periods as sort of the symbol of the economy, of the 258 00:29:27.380 --> 00:29:29.900 capitalistic economy. 259 00:29:29.900 --> 00:29:35.860 Just as global commerce, service industries and information industries have replaced 260 00:29:35.860 --> 00:29:43.620 Agriculture and Heavy Manufacturing Industries in the United States or as the leading features 261 00:29:43.620 --> 00:29:48.300 of the current capitalist economy. 262 00:29:48.300 --> 00:29:57.860 So Cantillon, Cantillon effects are really about relative prices, a distortion of relative 263 00:29:57.860 --> 00:30:06.180 Let me give you a couple of examples to take down in your notes. 264 00:30:06.180 --> 00:30:12.420 Say for example in Seattle, Washington where they grow apples, a good high quality apple 265 00:30:12.420 --> 00:30:21.260 cost one dollar, whereas a medium quality, medium quality apple cost about 50 cents. 266 00:30:21.260 --> 00:30:28.500 That means in terms of relative prices, one medium apple, excuse me, two medium apples 267 00:30:28.500 --> 00:30:36.180 are the equivalent of one high quality apple. So if you choose a high quality apple in Seattle, 268 00:30:36.180 --> 00:30:42.200 you're foregoing two medium quality apples. And then to that scenario, add a 50 cent per 269 00:30:42.200 --> 00:30:48.860 apple transportation charge to move those apples from Seattle down here to Alabama. 270 00:30:48.860 --> 00:30:56.060 Well, what do you get in Alabama, then, is that the higher quality apple now costs $1.50 271 00:30:56.060 --> 00:30:59.720 and the medium quality apple costs $1.00. 272 00:30:59.720 --> 00:31:05.700 So that the high quality apple, it means you have to forgo one and a half of the medium 273 00:31:05.700 --> 00:31:07.500 quality apples. 274 00:31:07.500 --> 00:31:16.100 The result of that transportation charge is an alteration in relative prices and it means 275 00:31:16.100 --> 00:31:25.740 is that the relative price of high quality apples in Alabama is lower than the same apple 276 00:31:25.740 --> 00:31:32.220 in Seattle and this explains why the high quality apples tend to be exported out of 277 00:31:32.220 --> 00:31:37.780 the state of Washington to other places around the country. 278 00:31:37.780 --> 00:31:46.020 It also explains why your lobsters up there in the northeast, why the very best lobsters 279 00:31:46.020 --> 00:31:53.420 Lobsters tend to be exported. If you're going to export lobsters from the Northeast to a 280 00:31:53.420 --> 00:31:59.820 place like Santa Fe, New Mexico, there's a heavy transportation charge. And the consequence 281 00:31:59.820 --> 00:32:08.100 is that only the very best lobsters of the prime age and prime size with the most tender 282 00:32:08.100 --> 00:32:15.300 meat are going to be transported out to these faraway places. And why a lot of the medium 283 00:32:15.300 --> 00:32:21.300 The same and lower quality lobsters remain in the local economy. 284 00:32:21.300 --> 00:32:26.300 Of course, I'm sure they're better prepared up there, but as far as the raw materials, 285 00:32:26.300 --> 00:32:30.300 the export industries usually get the very best. 286 00:32:30.300 --> 00:32:37.300 And this is another theme in my own research that I've used to tremendous effect. 287 00:32:37.300 --> 00:32:43.300 The changes in relative prices that are caused by risk and transportation charge, 288 00:32:43.300 --> 00:32:49.940 I've used that to explain why the potency of marijuana that's imported into the country 289 00:32:49.940 --> 00:32:52.780 has increased significantly over time. 290 00:32:52.780 --> 00:32:58.300 I was also able to use that same effect to explain why the blockade runners during the 291 00:32:58.300 --> 00:33:06.800 Civil War would import things like ladies' dresses rather than guns or food stocks and 292 00:33:06.800 --> 00:33:07.800 things like that. 293 00:33:07.800 --> 00:33:21.800 It's because there's a change in relative prices that gives an incentive to import the higher-quality, the higher-priced items. 294 00:33:21.800 --> 00:33:30.800 Okay, in context of the business cycle, what we see is changes in the interest rate caused by the Fed 295 00:33:30.800 --> 00:33:36.040 really are going to tip the balance or the relative prices between consumption 296 00:33:36.040 --> 00:33:42.200 goods and investment goods or capital goods and when the interest rates are 297 00:33:42.200 --> 00:33:50.760 reduced that favors the investment goods or the capital goods relative to 298 00:33:50.760 --> 00:33:57.520 consumption goods and in terms of the skyscrapers and the business cycle there 299 00:33:57.520 --> 00:34:02.440 There are three different Cantillon effects that I want to discuss where the interest 300 00:34:02.440 --> 00:34:10.160 rate causes a change in the structure of production in the economy and we can sort of witness these 301 00:34:10.160 --> 00:34:21.160 changes and how they impact and create an incentive to build record-setting skyscrapers. 302 00:34:21.160 --> 00:34:28.800 Okay, so we have three Kantian effects, all caused by changes in interest rates, and they're 303 00:34:28.800 --> 00:34:29.800 all reinforcing. 304 00:34:29.800 --> 00:34:35.280 In other words, if the interest rate goes down, they all have, the effect all goes in 305 00:34:35.280 --> 00:34:36.280 the same direction. 306 00:34:36.280 --> 00:34:42.200 If the interest rate goes up, it's going to discourage things like building large structures, 307 00:34:42.200 --> 00:34:44.920 certainly record-setting structures. 308 00:34:44.920 --> 00:34:51.000 Okay, the first Kantian effect is on the price of land. 309 00:34:51.000 --> 00:34:57.840 Reduced interest rates increase the price of land, particularly, of course, with real 310 00:34:57.840 --> 00:35:04.700 estate there's three factors, location, location, location, and so the prime locations are going 311 00:35:04.700 --> 00:35:13.480 to see the biggest effect. During the Japanese bubble it was said that one city block in 312 00:35:13.480 --> 00:35:20.480 downtown Tokyo was worth more than the entire GDP of the state of California. So it gives 313 00:35:20.480 --> 00:35:29.480 This gives you some idea of how distorted land prices can become, particularly in major cities in their central business district. 314 00:35:29.480 --> 00:35:41.480 So you reduce the interest rate, it increases the price of land, more so in the central business district than agriculture land. 315 00:35:41.480 --> 00:35:45.480 And this creates an incentive to build higher structures. 316 00:35:45.480 --> 00:35:56.480 You build higher structures with more floors so that you can spread out the cost of that land over more feet of rentable space. 317 00:35:56.480 --> 00:36:06.480 And so this is typical, whether you're in a business cycle or not, but the higher priced land you tend to see the highest structures. 318 00:36:06.480 --> 00:36:12.480 And as you move further away from the central business district and the price of land falls, 319 00:36:12.480 --> 00:36:39.480 The second Cantillon Effect relates to the organization of industry. As you reduce interest rates and you reduce the cost of capital, that creates an incentive to create bigger firms, more capital intensive firms, and to try to take advantage of economies of scale. 320 00:36:39.480 --> 00:36:47.760 In the Austrian circles we refer to it as a more roundabout production process. 321 00:36:47.760 --> 00:36:54.120 In the paper I give an example of the dairy industry, where the dairy industry goes from 322 00:36:54.120 --> 00:37:05.000 local production to regional production distribution, basically where 50 years ago every small town 323 00:37:05.000 --> 00:37:09.560 Now would have several dairy farmers in the local area. 324 00:37:09.560 --> 00:37:16.880 They would produce the milk and process the milk and actually distribute the milk all 325 00:37:16.880 --> 00:37:18.800 within the same firm. 326 00:37:18.800 --> 00:37:24.160 So you'd have local production, local processing and local distribution. 327 00:37:24.160 --> 00:37:29.440 Now what happens as production becomes more roundabout? 328 00:37:29.440 --> 00:37:36.280 So you have all these dairy farmers who produce the milk, but then that milk is brought to 329 00:37:36.280 --> 00:37:44.000 central processing plants or regional processing plants for the processing aspect of milk and 330 00:37:44.000 --> 00:37:45.520 dairy products. 331 00:37:45.520 --> 00:37:54.760 And then this larger company then distributes these products over a wider range of territory. 332 00:37:54.760 --> 00:37:59.100 And this is a natural part about the economy, but this is an illustration of what happens 333 00:37:59.100 --> 00:38:09.860 This can take place naturally or it can take place artificially in a boom and in the boom 334 00:38:09.860 --> 00:38:18.500 I think you probably see it most notably in terms of mergers and acquisitions where companies 335 00:38:18.500 --> 00:38:26.660 are growing and becoming more roundabout quickly through the process of mergers and acquisitions 336 00:38:26.660 --> 00:38:33.800 is buying up and acquiring firms of a similar nature and so you go from a local type of 337 00:38:33.800 --> 00:38:38.860 an industry to a regional to a national type of industry and national types of industries 338 00:38:38.860 --> 00:38:44.700 need national headquarters or even global headquarters and those global headquarters 339 00:38:44.700 --> 00:38:50.840 are going to be located in major cities and within the business districts and hence this 340 00:38:50.840 --> 00:38:57.080 This increases the pressure of the economic incentives to build bigger buildings. 341 00:38:57.080 --> 00:39:01.240 And finally, the third Cantillon effect is on technology. 342 00:39:01.240 --> 00:39:06.440 Every record-setting skyscraper requires a whole new set of technologies. 343 00:39:06.440 --> 00:39:13.280 You have questions about the foundation of it being able to hold up a larger structure, 344 00:39:13.280 --> 00:39:19.680 things like ventilation and heating, cooling, lighting, transporting through elevators and 345 00:39:19.680 --> 00:39:28.400 and Stairs, Communication, Electrical Power, Plumbing, Wind Resistance, Structural Integrity 346 00:39:28.400 --> 00:39:30.600 for Earthquakes and so forth. 347 00:39:30.600 --> 00:39:35.680 All of these questions have to be answered with a new answer, not existing technologies 348 00:39:35.680 --> 00:39:38.200 but brand new technologies. 349 00:39:38.200 --> 00:39:40.240 All of these things are harder to do. 350 00:39:40.240 --> 00:39:47.000 It's harder to pump water up 40 floors than it is 20 floors. 351 00:40:17.000 --> 00:40:24.300 In the United Arab Emirates, of course it's very hot there, and it says that the air conditioning 352 00:40:24.300 --> 00:40:36.080 requirements on a daily basis would be the equivalent of melting, I think it's 20 million 353 00:40:36.080 --> 00:40:40.200 tons of ice to keep that building cold. 354 00:40:40.200 --> 00:40:42.920 So you've got to have technology. 355 00:40:42.920 --> 00:40:46.580 All your input suppliers have to come up with new ways of doing things. 356 00:40:46.580 --> 00:40:53.300 They have to set up new factories for building all this new technology and it's got to be 357 00:40:53.300 --> 00:40:58.940 more effective technology because remember every tube, every wire that goes from the 358 00:40:58.940 --> 00:41:07.460 bottom to the top means that you're reducing the rentable space on the floor and on all 359 00:41:07.460 --> 00:41:15.380 of the floors, not just one floor, so that you can't just expand the air conditioning 360 00:41:15.380 --> 00:41:29.580 In the case of the Dubai Tower, out of 160 different floors, you've got a whole new technology 361 00:41:29.580 --> 00:41:33.820 that comes into play. 362 00:41:33.820 --> 00:41:41.180 These three Cantillon effects show how you're altering the structure of production and of 363 00:41:41.180 --> 00:41:48.540 Of course, you're creating these things in unique capital goods that can't easily be 364 00:41:48.540 --> 00:41:51.380 transformed into other uses. 365 00:41:51.380 --> 00:41:56.060 The technology can't be transformed into other uses and the buildings themselves can't be 366 00:41:56.060 --> 00:41:59.580 transferred into other uses. 367 00:41:59.580 --> 00:42:05.020 Now, all three of these results that I've described here today are the result of lower 368 00:42:05.020 --> 00:42:12.020 or interest rates, and they're all generally recognized by professionals who do these projects. 369 00:42:12.020 --> 00:42:21.500 So if you talk to engineers or architects or construction people, bankers, lenders, they'll 370 00:42:21.500 --> 00:42:30.980 all recognize these maybe not as being caused by the Federal Reserve, but they're well aware 371 00:42:30.980 --> 00:42:36.260 of the Role of Interest Rates and Technology and a lot of the things that I've discussed 372 00:42:36.260 --> 00:42:37.260 here. 373 00:42:37.260 --> 00:42:44.700 Of course, once all these projects are completed, it's very difficult to reorientate the capital 374 00:42:44.700 --> 00:42:49.300 that's been involved back to normal conditions. 375 00:42:49.300 --> 00:42:54.900 Skyscrapers really can't be used for other things and the builders and the input suppliers 376 00:42:54.900 --> 00:43:01.700 have little use for their innovations other than in building other tall skyscrapers. 377 00:43:01.700 --> 00:43:09.000 So that means there's a big drop in value across these industries and that's a reflection 378 00:43:09.000 --> 00:43:12.700 of what's actually going on in the real economy. 379 00:43:12.700 --> 00:43:22.860 So the paper goes on to discuss a lot of the aspects of construction and how they can become 380 00:43:22.860 --> 00:43:33.100 out of whack during the business cycles and how normally the constructing buildings is 381 00:43:33.100 --> 00:43:41.980 done with very precise formulas, everything is more or less set in stone and you have 382 00:43:41.980 --> 00:43:49.820 a good idea of how a building pays off but you see comments in there where during a boom 383 00:43:49.820 --> 00:43:57.380 During the new era, all of the rules of making money by building buildings seem to go out 384 00:43:57.380 --> 00:44:08.660 the window and people, instead of measuring the value of land and what it should be using 385 00:44:08.660 --> 00:44:13.940 set guidelines, they say, well, you know, it's just a matter of what people are willing 386 00:44:13.940 --> 00:44:21.180 to Pay, or Who I Can Sell This Speculative Project To. 387 00:44:21.180 --> 00:44:29.220 I don't know if you've seen this in your area, but during the housing bubble here in Auburn, 388 00:44:29.220 --> 00:44:36.700 there was a sort of a manic phase where people were building luxury game day condominiums. 389 00:44:36.700 --> 00:44:42.420 And the game day condominiums meant that people were buying things, buying luxury condos, 390 00:44:42.420 --> 00:44:46.340 So that when they came to Auburn football games, they'd have a place to stay and they'd have 391 00:44:46.340 --> 00:44:47.780 a place to park. 392 00:44:47.780 --> 00:44:55.660 So you basically are buying a quarter million dollar condominium for six weekends out of 393 00:44:55.660 --> 00:44:57.660 the year. 394 00:44:57.660 --> 00:45:05.220 And the big question for me was why were people doing this? 395 00:45:05.220 --> 00:45:11.220 How can you possibly get enough value out of that investment to justify six weekends 396 00:45:11.220 --> 00:45:19.020 a year living in a place and the general answer I got back is that we can always sell them 397 00:45:19.020 --> 00:45:27.660 later on to other people for more money and so that's really the type of thing that's 398 00:45:27.660 --> 00:45:33.340 going on during these record-setting skyscrapers. 399 00:45:33.340 --> 00:45:39.380 And so what I'm basically going to conclude here is that the Austrians have a theory of 400 00:45:39.380 --> 00:45:41.740 business cycles. 401 00:45:41.740 --> 00:45:47.380 The other schools of thought like the Keynesians attribute the business cycle to psychology, 402 00:45:47.380 --> 00:45:53.360 that we either are hyper speculative or depressed at various times. 403 00:45:53.360 --> 00:45:59.380 Other schools of thought basically say that things just happen, that various unanticipated 404 00:45:59.380 --> 00:46:05.460 Shocks just happened to the economy. There's no real explanation. There's no cause. It's 405 00:46:05.460 --> 00:46:11.060 just something that happened. And what the Austrians offer is a theory and a theory that 406 00:46:11.060 --> 00:46:19.940 involves a cause and effect analysis. We've spotted the problem. We've spotted the cause. 407 00:46:19.940 --> 00:46:28.380 We've been able to identify at least the major crises that have gone on in the United States. 408 00:46:28.380 --> 00:46:34.100 about the same time, the Keynesian economist and other mainstream economists have not only 409 00:46:34.100 --> 00:46:43.660 been oblivious to these looming economic crises, but actually said that no, that we've eliminated 410 00:46:43.660 --> 00:46:50.540 the business cycle due to our own good work and that we really don't have to worry about, 411 00:46:50.540 --> 00:46:59.580 We've done away with the business cycle and that the new era and the era of perpetual 412 00:46:59.580 --> 00:47:03.660 prosperity is here to stay. 413 00:47:03.660 --> 00:47:11.180 With that I've used up a pretty good amount of time so I think I'll stop there and hopefully 414 00:47:11.180 --> 00:47:12.180 take some questions. 415 00:47:12.180 --> 00:47:16.340 Thank you very much Professor Thornton, that was a fantastic lecture. 416 00:47:16.340 --> 00:47:29.340 This is Michael speaking. I'll start by asking sort of a general question. Over the last couple of years, we've seen unprecedented government intervention in the markets. 417 00:47:29.340 --> 00:47:43.340 We've seen public debt levels reach unprecedented heights as well. What is the consensus view out of the Austrian School with respect to the general direction of the economy? 418 00:47:43.340 --> 00:47:50.220 There's a fabulous binary debate out there right now with two camps, one of which thinks 419 00:47:50.220 --> 00:47:55.820 we're headed down the path of countries like Zimbabwe. 420 00:47:55.820 --> 00:48:02.320 The other, more representative of Japan, where they've spent two decades building bridges 421 00:48:02.320 --> 00:48:08.060 to nowhere and dropping money out of helicopters and really have nothing to show for it. 422 00:48:08.060 --> 00:48:14.260 So we would certainly welcome the opportunity to hear your view and that of the Austrian 423 00:48:14.260 --> 00:48:15.260 School. 424 00:48:15.260 --> 00:48:22.380 Well, Michael, I would say that Austrian economists, of course, do view everything the Fed and 425 00:48:22.380 --> 00:48:26.500 the Treasury has done as unprecedented. 426 00:48:26.500 --> 00:48:35.300 And we also, there is a consensus that all of this is the wrong approach to things. 427 00:48:35.300 --> 00:48:46.260 And basically, not a scientific survey, but I would say that we're all scared of what 428 00:48:46.260 --> 00:48:50.980 Washington D.C. has been doing. 429 00:48:50.980 --> 00:49:01.900 They've been following basically the Japanese model of zero interest rates, of giving credit 430 00:49:01.900 --> 00:49:14.900 and loans to companies that are insolvent, are bankrupt, and so all of this unprecedented 431 00:49:14.900 --> 00:49:25.180 attempt to rescue the economy is all misguided, it has no chance of working, and it's also 432 00:49:25.180 --> 00:49:36.180 are also going to make the consequences of this economic crisis much larger, more severe, and more drawn out. 433 00:49:36.180 --> 00:49:46.180 The Japanese economy was basically taken from one of the best and the most vibrant economy in the world 434 00:49:46.180 --> 00:49:56.680 and given this continual Keynesian stimulus, public works, easy credit and it's basically 435 00:49:56.680 --> 00:50:03.460 destroyed which was once one of the greatest economies in the world. 436 00:50:03.460 --> 00:50:12.660 But there is no real consensus as to whether we're following the deflationary or the inflationary 437 00:50:12.660 --> 00:50:22.700 pattern and part of that is the result of the definitions of inflation. 438 00:50:22.700 --> 00:50:29.500 For me, I think we're going to get both depending upon your definition of inflation. 439 00:50:29.500 --> 00:50:40.680 I think that as far as inflation of the money supply, I think that the Fed under Bernanke 440 00:50:40.680 --> 00:50:48.980 is going to follow an inflationary policy whereby they will be attempting to increase 441 00:50:48.980 --> 00:50:56.840 the money supply or at least maintain it where it is. They are inside the Federal Reserve 442 00:50:56.840 --> 00:51:05.260 Board in Washington DC. They are deathly afraid of deflation. And so basically they're going 443 00:51:05.260 --> 00:51:35.260 The Federal Reserve is going to do anything possible in order to reinflate the economy, which means they're going to overshoot, so that once the banks do start lending, the Fed is going to allow that process to go on for an extended period of time, and of course because of political pressures, even if it wasn't Bernanke's own model, and his own mindset, and his own fear, his own concern, 444 00:51:35.260 --> 00:51:57.260 There is concern over his reputation. There is also the additional political pressures in Washington that favor more inflation because they are more concerned with trying to get employment back going. 445 00:51:57.260 --> 00:52:06.660 Now as far as deflation, Austrians are all for that, Bernanke is all fearful of that, 446 00:52:06.660 --> 00:52:17.320 but I think what we're getting is deflation of asset prices. And that's what most people, 447 00:52:17.320 --> 00:52:22.020 when they talk about deflation, they're not really talking about the old CPI, they're 448 00:52:22.020 --> 00:52:35.220 What we would have liked to have seen, or at least what I would have liked to have seen, 449 00:52:35.220 --> 00:52:45.300 was what was happening after the skyscraper signal announced a global crisis coming. 450 00:52:45.300 --> 00:52:48.980 What was happening in the economy was what we were hoping in the economy. 451 00:52:48.980 --> 00:52:57.980 We were seeing things like the mortgage originators, dealers, whatever, going out of business one right after another. 452 00:52:57.980 --> 00:53:08.980 We were seeing a contraction in the housing industry and construction companies cutting back on production and going out of business. 453 00:53:08.980 --> 00:53:17.980 A lot of the little guys, at least, sensed that the game was up and were basically leaving town. 454 00:53:17.980 --> 00:53:27.220 The stock market started correcting and what was going to happen was that many more of 455 00:53:27.220 --> 00:53:33.740 these large New York City commercial banks would have gone out of business, Fannie Mae 456 00:53:33.740 --> 00:53:39.140 and Freddie Mae would have gone out of business, and that's what we want. 457 00:53:39.140 --> 00:53:48.220 You know, it would have been terrible in terms of economic conditions, but we want a large 458 00:53:48.220 --> 00:53:52.660 part of the derivatives market, for example, to fail. 459 00:53:52.660 --> 00:53:58.580 There's a lot of good things about derivatives, but there's a lot of excess, basically, you 460 00:53:58.580 --> 00:54:02.140 know, when you get to the casino side of the derivatives market. 461 00:54:02.140 --> 00:54:03.900 We wanted that to go out of business. 462 00:54:03.900 --> 00:54:11.340 You know, the existence of so many hedge funds, for example, we clearly want a cleaning up 463 00:54:11.340 --> 00:54:18.220 of that particular industry and we wanted the government-sponsored enterprises like 464 00:54:18.220 --> 00:54:24.980 Fannie Mae and Freddie Mac, we clearly want those and have always wanted those to go out 465 00:54:24.980 --> 00:54:31.320 of business and to cease operations because they're an artificial impairment to the allocation 466 00:54:31.320 --> 00:54:38.520 of Resources in the Economy, you know, we're not exactly even for home ownership. I mean, 467 00:54:38.520 --> 00:54:46.360 the government was pro home ownership. Austrians are neutral with respect to, you know, things 468 00:54:46.360 --> 00:54:54.320 like that. Those are normative issues. But as an economist, looking at the modern economy, 469 00:54:54.320 --> 00:55:00.460 I'm thinking we don't want more home ownership. We want less home ownership because we want 470 00:55:00.460 --> 00:55:08.460 Our labor has to be more mobile and flexible, especially at the upper end. 471 00:55:08.460 --> 00:55:15.740 Your students are hopefully going to be getting jobs where they may have to move several times. 472 00:55:15.740 --> 00:55:18.280 They may have to change companies several times. 473 00:55:18.280 --> 00:55:23.800 They may have to take assignments, temporary assignments in other places around the country 474 00:55:23.800 --> 00:55:27.460 or maybe even other places around the world. 475 00:55:27.460 --> 00:55:36.060 So we want a very flexible home market and not necessarily pinning people down in their 476 00:55:36.060 --> 00:55:37.060 own home ownership. 477 00:55:37.060 --> 00:55:46.580 So there's a lot of things that could have been cleaned up in this contraction, which 478 00:55:46.580 --> 00:55:52.060 we call it a correction, because it's the process of correcting that cluster of errors 479 00:55:52.060 --> 00:55:55.380 that took place during the boom. 480 00:55:55.380 --> 00:56:07.300 So they've tried to put a stop to that deflationary process, which otherwise would have seen a 481 00:56:07.300 --> 00:56:15.420 collapse in these asset prices, would have seen a lot of bankruptcies and foreclosures, 482 00:56:15.420 --> 00:56:20.340 drastic reduction in the prices of all those things, which would have increased the purchasing 483 00:56:20.340 --> 00:56:43.300 In the 19th century, when there wasn't a lot of ways for the government to intervene, you'd 484 00:56:43.300 --> 00:56:50.140 see these very steep and severe contractions in the economy. 485 00:56:50.140 --> 00:56:57.060 and then rapid expansions because the prices of assets would come down, there would be 486 00:56:57.060 --> 00:57:02.500 foreclosures and bankruptcies, the assets would change hands at much lower prices and 487 00:57:02.500 --> 00:57:10.780 the new entrepreneurs would be putting people back to work. 488 00:57:10.780 --> 00:57:21.180 Well, thank you. I will give Fanny and Freddie credit for doing an extraordinary job of destroying 489 00:57:21.180 --> 00:57:26.060 value. I don't know if there's destroying shareholder value. I don't know if there's 490 00:57:26.060 --> 00:57:31.220 another company out there that has been as successful as them over the last 30 years 491 00:57:31.220 --> 00:57:35.740 in destroying shareholder value. I think they probably hold the record. But before I ask 492 00:57:35.740 --> 00:57:40.740 Another question, let me open it up and see if there's anyone else that has a question. 493 00:57:40.740 --> 00:57:42.740 I'll go from here. 494 00:57:42.740 --> 00:57:43.740 Yes. 495 00:57:43.740 --> 00:57:48.740 Again, thank you for taking the time to talk to us Mr. Ford. 496 00:57:48.740 --> 00:57:54.740 From your speech I gathered that skyscraper construction is just the tip of the iceberg. 497 00:57:54.740 --> 00:57:58.740 So what I don't understand is why you put so much emphasis on it. 498 00:57:58.740 --> 00:58:03.740 Would it not be much simpler to say that the causes of skyscraper production, 499 00:58:03.740 --> 00:58:15.740 As you said, economic boom and interest rates are a sign of depression rather than the construction of the skyscraper itself, and that boom leads to an impeding economic bust. 500 00:58:33.740 --> 00:58:35.740 of Real Estate 501 00:59:03.740 --> 00:59:13.500 of a massive process in the economy that affects, you know, not just the central 502 00:59:13.500 --> 00:59:20.240 city, commercial districts, but places throughout the country. Another thing 503 00:59:20.240 --> 00:59:25.220 that the mainstream economist and the Fed economist and the real estate people 504 00:59:25.220 --> 00:59:30.580 would say, well, you know, prices are going up in California, prices are going 505 00:59:30.580 --> 00:59:35.920 going up in Nevada and Florida, but most of the country prices are only going up at a 506 00:59:35.920 --> 00:59:45.320 reasonable rate. But for the Austrians, it's not just the price that matters even. So that 507 00:59:45.320 --> 00:59:55.420 if we were to say double the number of houses in the economy this year and the prices didn't 508 00:59:55.420 --> 01:00:02.980 and change at all, we would still have made a lot of male investments or bad investments 509 01:00:02.980 --> 01:00:03.980 in the economy. 510 01:00:03.980 --> 01:00:11.600 We would still have misallocated our resources in the present and constructed them in such 511 01:00:11.600 --> 01:00:17.720 a way that they wouldn't provide very much value over the life of the project. 512 01:00:17.720 --> 01:00:24.520 So what we're talking about in terms of business cycles is a massive problem. 513 01:00:24.520 --> 01:00:30.240 The systemic problem throughout the economy and indeed most of these crises are global 514 01:00:30.240 --> 01:00:38.320 in nature so that countries around the world that joined in may have been connected to 515 01:00:38.320 --> 01:00:47.380 the U.S. dollar, for example, are very much being affected by this same general process. 516 01:00:47.380 --> 01:00:56.500 It's just that knowing the difference between a business cycle and a normal pattern of economic 517 01:00:56.500 --> 01:01:00.540 growth is very hard to tell. 518 01:01:00.540 --> 01:01:05.180 It's very much an art, it's very much not like a science. 519 01:01:05.180 --> 01:01:10.800 We cannot predict things scientifically for sure. 520 01:01:10.800 --> 01:01:19.400 We can't even know to the extent of how much influence the Fed is having on artificially 521 01:01:19.400 --> 01:01:25.680 distorting the interest rate from what it actually is to what the market would have 522 01:01:25.680 --> 01:01:27.280 produced. 523 01:01:27.280 --> 01:01:34.800 So we're using a lot of investigative tools, a lot of hunches, a lot of statistics, a lot 524 01:01:34.800 --> 01:02:04.800 There's a lot of anecdotal evidence to help us sniff out the difference between a boom and an economic growth, and you see in the later part of the paper, this discussion goes into great detail about all this, but skyscrapers, you know, the fact that we see multiple record-setting 525 01:02:34.800 --> 01:03:04.800 You have to, in order to sense out these booms and looming busts, we want to bring everything we can to bear because it's incredibly difficult to be able to see these things coming and we even rely on anecdotal evidence of people day trading stocks without any knowledge of what's going on and they're making money and they're telling their friends to quit their jobs 526 01:03:34.800 --> 01:03:41.800 Thank you Professor, any more questions? 527 01:04:04.800 --> 01:04:16.800 No, well I'll give you, I'll let, I'll allow everyone to sort of leave on one final thought 528 01:04:16.800 --> 01:04:17.800 here. 529 01:04:17.800 --> 01:04:23.280 What is, there was a fantastic article about, maybe a week and a half ago, two weeks ago 530 01:04:23.280 --> 01:04:31.240 on the business insider, on skyscrapers and the business cycle and Professor Thornton, 531 01:04:31.240 --> 01:04:55.240 Well, that's a good question. It's really difficult to get information about the building of these skyscrapers that are currently going on. 532 01:04:55.240 --> 01:05:03.680 You know, it doesn't have to be even record-setting skyscrapers. 533 01:05:03.680 --> 01:05:10.560 The record-setting skyscrapers, they're very secretive about, they very often put out misleading 534 01:05:10.560 --> 01:05:15.640 plans that they're not actually building the record-setting skyscrapers. 535 01:05:15.640 --> 01:05:25.640 Right now I think that with the Bourges-Dubai Tower being so high, so much higher than the 536 01:05:25.640 --> 01:05:36.560 other skyscrapers, that I don't foresee anybody actually beating that record. 537 01:05:36.560 --> 01:05:41.800 There is some indication out of China that the Chinese want to build a record-setting 538 01:05:41.800 --> 01:05:49.400 and Skyscraper and that would be very apropos of course because of China's role now in the 539 01:05:49.400 --> 01:05:57.600 global economy and a long time ago when the paper was published in 2005 there was supposed 540 01:05:57.600 --> 01:06:02.200 to be a record-setting skyscraper in Shanghai that was going to be completed in the year 541 01:06:02.200 --> 01:06:05.200 2012. 542 01:06:05.200 --> 01:06:11.880 The latest information I have is that, which again is not all that reliable, is that they're 543 01:06:11.880 --> 01:06:18.880 going to have a record-setting skyscraper completed in 2013 in China. 544 01:06:18.880 --> 01:06:25.380 Now it doesn't say, I have not been able to confirm, whether that would be a global record 545 01:06:25.380 --> 01:06:29.560 or a Chinese record. 546 01:06:29.560 --> 01:06:40.360 But the plain fact of the matter is that China is building skyscrapers in a way that is reminiscent 547 01:06:40.360 --> 01:06:51.160 of the construction that went on in Dubai before the Burj Tower was completed or in 548 01:06:51.160 --> 01:06:57.680 Nevada, in Las Vegas, Nevada where all of the casino and housing construction was going 549 01:06:57.680 --> 01:07:09.520 on when they had to change the name of the state bird to the construction crane at the 550 01:07:09.520 --> 01:07:12.160 time as a joke. 551 01:07:12.160 --> 01:07:21.480 And so China, whether or not they have a world record or a local record, the level of activity 552 01:07:21.480 --> 01:07:32.720 over there in terms of construction gives the same appearance of a significant bubble 553 01:07:32.720 --> 01:07:42.560 in the works and you know China is also a country that all of the same similar factors 554 01:07:42.560 --> 01:07:50.760 have been applied that existed in the past that China's rate of economic growth is spectacular 555 01:07:50.760 --> 01:08:06.760 that it's a new era and they certainly have a lot of good fundamental factors going on there in terms of their policy and in terms of their micro policies and the freedom that exists in their economy. 556 01:08:06.760 --> 01:08:19.120 So they're free enough now to create a significant economic bubble and their policy to address 557 01:08:19.120 --> 01:08:29.480 the economic crisis last year and their stimulus package was considered the most significant 558 01:08:29.480 --> 01:08:36.080 around the world in terms of the amount of money that they put to work stimulating public 559 01:08:36.080 --> 01:08:45.160 Works Projects. At the same time, they also did the most in terms of monetary expansion. 560 01:08:45.160 --> 01:08:53.760 Basically by forcing state banks and encouraging private banks, they doubled the amount of 561 01:08:53.760 --> 01:09:02.720 lending in their economy last year over the previous year. At a time when the capacity 562 01:09:02.720 --> 01:09:11.640 in the Chinese economy was already far outstripping the demand for that capacity. 563 01:09:11.640 --> 01:09:19.680 And so, given that a lot of their customers, who they sell to, like the United States, 564 01:09:19.680 --> 01:09:28.280 is in a quagmire, the European economy is in a quagmire and facing about at least a 565 01:09:28.280 --> 01:09:37.240 to half a dozen nations with sovereign debt problems, at least as significant as Greece 566 01:09:37.240 --> 01:09:46.200 in terms of their size and their magnitude. It seems to me that the Chinese can still 567 01:09:46.200 --> 01:09:52.280 have enough authority over their economy that they can make the statistics work, but in 568 01:09:52.280 --> 01:09:59.720 In terms of the real aspects of their economy, I expect, or I think we should expect, significant 569 01:09:59.720 --> 01:10:07.440 economic troubles in that economy, whether or not there's a skyscraper here at work 570 01:10:07.440 --> 01:10:10.440 in terms of setting the record. 571 01:10:10.440 --> 01:10:14.640 Well, Professor Zornin, thank you very much for your time. 572 01:10:14.640 --> 01:10:19.680 We've very much enjoyed your lecture today and appreciate it. 573 01:10:19.680 --> 01:10:21.680 Thank you very much.