WEBVTT NOTE Bernanke and the Dollar 1 00:00:00.000 --> 00:00:12.000 I will try to go through this one, the prepared remarks, fairly quickly to leave time at the end because I, just to give you time for Q&A just for whatever we've talked about or haven't talked about, things you're curious. 2 00:00:12.000 --> 00:00:20.000 And going around, I've noticed especially with investors and things like this, this stuff is the one that really makes people get nervous. 3 00:00:20.000 --> 00:00:41.000 Let me just talk a little bit about, James mentioned that we go around the country and for those of you who agree with the message of the Mises Institute, it is encouraging, I will say this, going around, I mean there are more and more people who are becoming aware of these things and are concerned. 4 00:00:41.000 --> 00:01:11.000 I've seen that there's a change. First of all, the turnout. When you go to these events that we put them on over the different places, they're getting bigger and bigger. And also the type of person that comes. It's people who, it's not like they were real ideological their whole lives. Like there's more and more people who are just saying, hey, you know, what the heck just happened? I lost 40% in my portfolio. You know, that's kind of scary. I joke with my parents. They're in a similar situation. They just recently retired. They had a bunch of money. 5 00:01:11.000 --> 00:01:18.000 I told my dad to start smoking. That was my solution. 6 00:01:22.000 --> 00:01:32.000 So you do see that transition. Or another sort of indication that the Austrian messages reaching a bigger crowd. 7 00:01:32.000 --> 00:01:38.000 When I would write articles for Mises.org, five years ago, I would get fan mail from college students mostly. 8 00:01:38.000 --> 00:01:44.000 People say, oh yeah, my professor loves Friedrich Hayek and he makes me read this site and hey, that was a pretty funny article. He had great stuff. 9 00:01:44.000 --> 00:01:52.000 Now it's people who work on Wall Street for hedge funds saying, what do you think about, is there a bond bubble or what do you think about this? 10 00:01:52.000 --> 00:02:00.000 So it's people that are realizing now that they're taking this seriously because no one really cared about what was the multiplier on government spending eight years ago. 11 00:02:00.000 --> 00:02:04.000 Nobody cared about that except economists and real nerdy Austrian fans, right? 12 00:02:04.000 --> 00:02:11.000 But now people do care about that because they know if a bunch of economists say it means one number, then they're going to spend another trillion dollars. 13 00:02:11.000 --> 00:02:20.000 And so they realize that this stuff actually is important and so more and more people are curious about Austrian economics. 14 00:02:20.000 --> 00:02:26.000 It doesn't mean that they're all full-fledged Austrians, but there is a lot more interest in the stuff that the Mises Institute does. 15 00:02:26.000 --> 00:02:32.000 And it's good, therefore, that the Institute was there with all this literature available, all these lectures. 16 00:02:32.000 --> 00:02:38.560 Because say what you will, the Austrians are pretty good about communicating stuff to the lay person. 17 00:02:38.560 --> 00:02:42.600 So I think that's partly why we have our foot in the doors, because people actually understand what we're saying. 18 00:02:42.600 --> 00:02:48.160 And it's not just that we put up a bunch of equations, they trust us. I'm from MIT and I'm here to help. 19 00:02:48.160 --> 00:02:55.000 All right, so this talk here is Bernanke and the dollar. Let me just walk you through some of this stuff. 20 00:02:55.000 --> 00:02:58.960 The first thing is, let me try to explain it, inflation, fractional reserve banking. 21 00:02:58.960 --> 00:03:11.960 This is tricky stuff. When I had to teach this in Hillsdale to students, I would tell the janitors to lock all the windows to make sure kids weren't just jumping out. 22 00:03:11.960 --> 00:03:18.960 This stuff can be very boring, but in this context, I'll try to make it as easy as possible. 23 00:03:18.960 --> 00:03:22.960 It really is important for you to understand the basics of this because when people say, 24 00:03:22.960 --> 00:03:28.960 People say, oh, the Fed's doing quantitative easing, pumping in $600 billion, a lot of people don't really know what that means. 25 00:03:28.960 --> 00:03:31.960 What do you mean the Fed's pumping in $600 billion? What do you mean? 26 00:03:31.960 --> 00:03:35.960 So I'm just going to try to walk you through the mechanics of what's going on. 27 00:03:35.960 --> 00:03:43.960 Now, this business partner that I have in Nashville, I've seen him give some PowerPoint presentations about inflation, 28 00:03:43.960 --> 00:03:48.960 and he always starts, he doesn't start talking about the US government, because I think it's hard for people, 29 00:03:48.960 --> 00:03:51.960 because based on your political views, you know, you might be defensive or whatever, 30 00:04:21.960 --> 00:04:28.360 over here, he's got his army to maintain, he's got bread to hand out to people, and 31 00:04:28.360 --> 00:04:33.160 the, you know, Colosseum, bread and circuses was the catchphrase, alright, so he's got 32 00:04:33.160 --> 00:04:34.680 to pay a lot of stuff. 33 00:04:34.680 --> 00:04:35.680 So how does he do it? 34 00:04:35.680 --> 00:04:39.920 Well, he can tax people, but if he taxes them too heavily they get mad, they revolt, so 35 00:04:39.920 --> 00:04:40.920 he doesn't want that. 36 00:04:40.920 --> 00:04:41.920 So what does he do? 37 00:04:41.920 --> 00:04:46.800 One clever trick that he would do, he would debase the currency, so you have a bunch of 38 00:04:46.800 --> 00:04:54.360 gold coins and then you take some baser metal and then you melt down the gold coins, mix 39 00:04:54.360 --> 00:04:59.800 in the baser metal and then re-strike coins and now instead of you know three gold coins 40 00:04:59.800 --> 00:05:04.160 now he's got five coins that have some gold in them but they of course their gold content 41 00:05:04.160 --> 00:05:07.700 is not as high as it was because he mixed in the baser metal so that's what the term 42 00:05:07.700 --> 00:05:12.540 debasing the currency that's originally where it comes from is that they literally would 43 00:05:12.540 --> 00:05:18.860 And watered down, so to speak, the silver or the gold that was in the coins. 44 00:05:18.860 --> 00:05:21.780 So what would happen, of course, is the prices would go up. 45 00:05:21.780 --> 00:05:28.100 So you were a merchant and you start getting coins for a fish that used to cost one coin, 46 00:05:28.100 --> 00:05:30.460 and then you realize, wait a minute, there's not actually as much gold in this coin as 47 00:05:30.460 --> 00:05:32.940 there was last year. 48 00:05:32.940 --> 00:05:36.220 You're going to raise the number of gold coins that that fish costs, right? 49 00:05:36.220 --> 00:05:41.180 Because you're obviously, what you're concerned about is the actual gold content, not how 50 00:05:41.180 --> 00:06:11.180 The Theory of Money and Credit 51 00:06:11.180 --> 00:06:14.680 Right now, if you look at your coins, even, there's notches around it, that's where that 52 00:06:14.680 --> 00:06:18.440 comes from, that you could easily tell by just visual inspection if someone had been 53 00:06:18.440 --> 00:06:22.940 clipping the edge of the coin, if they had those notches in it, right, you could be able 54 00:06:22.940 --> 00:06:23.940 to tell. 55 00:06:23.940 --> 00:06:26.640 All right, so there's all sorts of little tricks of people debasing the currency over 56 00:06:26.640 --> 00:06:29.860 the years, but you get the basic idea. 57 00:06:29.860 --> 00:06:35.980 So what was ultimately happening was, Caesar had a certain amount of tax revenue, and he, 58 00:06:35.980 --> 00:06:40.300 in the short run at least, made it look like he had more money by debasing it, so he goes 59 00:06:40.300 --> 00:06:54.300 Mises talks about the fall of the Roman Empire. That's partly what happened. Rome just kept debasing the currency. You get price inflation. People complain because, hey, bread costs more now than it did last year. What's going on? And then they would pass strict price control laws. 60 00:06:54.300 --> 00:06:58.300 When Mises talks about the fall of the Roman Empire, that's partly what happened. 61 00:06:58.300 --> 00:07:01.300 Rome just kept debasing the currency. You get price inflation. 62 00:07:01.300 --> 00:07:06.300 People complain because, hey, bread costs more now than it did last year. What's going on? 63 00:07:06.300 --> 00:07:08.300 And then they would pass strict price control laws. 64 00:07:08.300 --> 00:07:13.300 Say, if we catch any merchant trying to charge more for bread than he did last year, we'll cut your hand off. 65 00:07:13.300 --> 00:07:15.300 And so then people just stop making bread. 66 00:07:15.300 --> 00:07:19.300 Why would I sell it if it's costing me more than I can sell it for? 67 00:07:19.300 --> 00:07:22.300 And so now people are leaving the cities, going to the countryside to forage for food. 68 00:07:22.300 --> 00:07:27.180 OK, so all this stuff that you may have learned in your Western Civ class in terms of the 69 00:07:27.180 --> 00:07:31.460 historical progression and just, you know, the way there it's explained is all of a sudden 70 00:07:31.460 --> 00:07:35.900 for some reason the barbarians were able to overcome the Roman armies whereas for centuries 71 00:07:35.900 --> 00:07:39.860 before they couldn't, Mises actually gives an economic explanation for why that was the 72 00:07:39.860 --> 00:07:43.020 case. It was because of all this stuff going on. That's what the difference was. It wasn't 73 00:07:43.020 --> 00:07:48.380 that the Roman soldiers forgot how to use a spear all of a sudden. 74 00:07:48.380 --> 00:07:59.700 Alright, so Uncle Sam also has bills to pay. So you got huge military expenditures, food 75 00:07:59.700 --> 00:08:07.800 stamps and all kinds of important stuff in outer space, right? So now here, this is where 76 00:08:07.800 --> 00:08:14.660 it gets a little tricky. So I think everybody understands the thing with what Caesar was 77 00:08:14.660 --> 00:08:21.660 The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit 78 00:08:44.660 --> 00:09:14.660 So, this is a treasury bond. So, specifically what happens, the U.S. Federal Government runs a deficit, right? So they take in a certain amount of tax revenue, and then they spend more than that. So they have to cover that deficit somehow. Just like a corporation, they issue bonds. IOUs, this thing saying to somebody in the marketplace, here, we'll give you this legally binding IOU, you give us money right now, we're going to go spend it. 79 00:09:14.660 --> 00:09:28.660 on tanks and food stamps and whatever, and then this thing says that whatever, 10 years from now we'll give you your money back plus some interest, or we'll make interest payments all along the way and then give you your principal back 10 years from now, if it's a 10 year bond. 80 00:09:28.660 --> 00:09:40.660 So that's how they're covering their deficit, but where the Fed comes into play is the Fed is a huge buyer of this government debt. 81 00:09:40.660 --> 00:09:51.660 And so that's what I'm showing here is that this new money is being created and so Bernanke is just creating extra money and using it to buy debt. 82 00:09:51.660 --> 00:09:57.660 So the same way that Caesar had three gold coins and then turned it into five by debasing the currency, 83 00:09:57.660 --> 00:10:05.660 analogously here I'm showing you started out with $300 bills and now all of a sudden there's two more that the government has its hands on. 84 00:10:05.660 --> 00:10:35.660 Bernard has his hands on it and so where did that money come from? The Fed created it out of thin air. Now specifically, what happens, and this is the part that gets a little tricky to visualize, Bernanke, when he wants to, let's take this recent announcement of quantitative easing, Bernanke is going to buy $600 billion of more government debt. He goes out into the marketplace and he buys it from people who had previously bought those bonds from the government. So the Fed is not literally working with the Treasury. 85 00:10:35.660 --> 00:10:39.300 go through a middle man. 86 00:10:39.300 --> 00:10:43.060 So how does Bernanke come up with $600 billion, how does he get the $600 billion? 87 00:10:43.060 --> 00:10:46.300 Well it's not that he was cutting lawns all summer and saved up $600 billion and now was 88 00:10:46.300 --> 00:10:48.080 going to spend it. 89 00:10:48.080 --> 00:10:53.220 He just writes checks on the Federal Reserve, just out of thin air. 90 00:10:53.220 --> 00:10:57.660 It's not that there's a stockpile of money that whenever the Fed buys money you have 91 00:10:57.660 --> 00:10:58.660 to debit that account. 92 00:10:58.660 --> 00:11:01.700 Uh oh, we're running low on money, the Fed has an unlimited amount of money. 93 00:11:01.700 --> 00:11:08.100 Right's checks on the Fed, gives it to somebody in the private sector who has these bonds. 94 00:11:08.100 --> 00:11:13.820 That person now has a check from the Federal Reserve, deposits in his checking account, 95 00:11:13.820 --> 00:11:19.540 and then his bank, his commercial bank, its deposits with the Fed go up by that amount. 96 00:11:19.540 --> 00:11:25.600 So one way of thinking about it is when Bernanke wants to get $600 billion in bonds that are 97 00:11:25.600 --> 00:11:31.800 Right now in the marketplace, just imagine he's opening up an Excel spreadsheet that 98 00:11:31.800 --> 00:11:35.980 says, up, Citibank has this much on deposit, Bank of America has this much, and he just 99 00:11:35.980 --> 00:11:40.720 bumps up the numbers in those cells by 600 billion, and all the banks hand over 600 billion 100 00:11:40.720 --> 00:11:44.520 worth of bonds, and now the Fed's sitting on those bonds, right? 101 00:11:44.520 --> 00:11:48.840 So that's, you know, sometimes when I tell people that, sometimes they don't believe 102 00:11:48.840 --> 00:11:50.520 me, but that's what it is, right? 103 00:11:50.520 --> 00:11:54.440 There's nothing backing up with the Fed does when it creates money. 104 00:11:54.440 --> 00:12:03.120 Okay, so, of course prices go up, and then I show Bernanke being consternated, but actually, 105 00:12:03.120 --> 00:12:07.520 they want inflation now, paradoxically enough, the whole point of this is they want price 106 00:12:07.520 --> 00:12:10.440 inflation to go up. 107 00:12:10.440 --> 00:12:14.160 Is a little esoteric, let me just walk you through this quickly. 108 00:12:14.160 --> 00:12:18.940 A lot of people associate with the Mises Institute, it's not merely the Federal Reserve doing 109 00:12:18.940 --> 00:12:22.680 this stuff that they think is the problem, they think it's the fractional reserve banking 110 00:12:22.680 --> 00:12:26.600 Banking System per se. And so the process I just described, there's a version of that 111 00:12:26.600 --> 00:12:30.740 that happens even that your commercial bank can do, in a sense creating money out of thin 112 00:12:30.740 --> 00:12:31.740 air. 113 00:12:31.740 --> 00:12:36.200 So, I'll just walk you through this example. Let's say this guy's got $1,000 in actual 114 00:12:36.200 --> 00:12:42.040 currency and he puts it in Washington Mutual and they go put it in the vault. Okay, so 115 00:12:42.040 --> 00:12:49.000 now what happens, that guy electronically, he's got checking balance of $1,000. You say, 116 00:12:49.000 --> 00:12:55.000 Last Tuesday, I just put $1,000 in the bank. Let me go to the ATM, let me show you, put my card in there. Look it, I got $1,000 in the bank. 117 00:12:55.000 --> 00:13:01.000 So he's walking around town thinking he's got $1,000 he can spend. So that's clearly part of the money supply. 118 00:13:01.000 --> 00:13:09.000 But now what does Washington Mutual do? Well, maybe this woman comes along and she wants to borrow some money to buy a used car. 119 00:13:09.000 --> 00:13:16.000 And she borrows $900 from Washington Mutual. So she signs the note to borrow the $900. 120 00:14:16.000 --> 00:14:25.000 Part of what's going on with the boom-bust cycle, Austrians think if you really get into the literature that they think fractional reserve banking has a lot to do with it. 121 00:14:25.000 --> 00:14:39.000 Okay, so summing up, the Fed creates new reserves in the financial system, what's called base money, when it buys assets, so treasury bonds, also they bought a lot of mortgage-backed securities when the financial crisis really hit. 122 00:14:39.000 --> 00:14:43.000 Commercial banks also create new checking deposits. 123 00:14:43.000 --> 00:14:47.000 Those are broader aggregates, like M1, M2, those sorts of things, 124 00:14:47.000 --> 00:14:51.000 when they make new loans that are backed up by the new reserves. 125 00:14:51.000 --> 00:14:57.000 And then the injection of the new money available to borrow pushes down interest rates, causing the boom-bust cycle as Mises-Hayek described. 126 00:14:57.000 --> 00:15:01.000 Okay, so this is, I'm sort of tying in a few threads here, 127 00:15:01.000 --> 00:15:06.000 but when the Fed creates new money by buying stuff, 128 00:15:06.000 --> 00:15:16.000 And so, again, if you think the market interest rate that corresponds to the real savings means something, well, then this is going to set up that boom-bust cycle we talked about last lecture. 129 00:15:16.000 --> 00:15:23.000 Okay, and then beyond that, beyond the boom-bust cycle, just in general, why is there this secular increase in prices year after year? 130 00:15:23.000 --> 00:15:29.000 means something, well then this is going to set up that boom-bust cycle we talked about last lecture. 131 00:15:29.000 --> 00:15:37.000 Okay, and then beyond that, beyond the boom-bust cycle, just in general, why is there this secular increase in prices year after year? 132 00:15:37.000 --> 00:15:45.000 They say it's because of the fact that the Fed and the banks are literally creating more money all the time when they do this. 133 00:15:45.000 --> 00:15:55.680 And you can see here, Austrians, especially the ones associated with the Mises Institute, tend to be fans of the gold standard. 134 00:15:55.680 --> 00:16:03.800 Meaning they say, look, given that you're going to have a government controlling the money supply, at least tie its hands somehow. 135 00:16:03.800 --> 00:16:14.740 And the way to do that historically was the classical gold standard, that originally, if you had $20.67 in US currency, 136 00:16:14.740 --> 00:16:44.740 You could go up to the government and say, I want an ounce of gold, and they would have to give it to you legally, because the dollar was backed up by gold, and that tied the hands of the government. They couldn't just print up new money recklessly, because, loosely speaking, that would push up the price of gold, and then people would turn in their dollars for gold, and the government's gold reserves would get drained, and so they'd have to back off and not print so much money, because they would be in danger of losing their gold reserves. So, I'm sure most of you know this, but just in case some of you don't, 137 00:16:44.740 --> 00:16:51.620 Well, that ended in 1933. One of his very first things coming into office, FDR literally 138 00:16:51.620 --> 00:16:56.340 seized the gold from everyone in the United States. It was under threat of a $10,000 penalty 139 00:16:56.340 --> 00:17:03.820 in a jail term. And that was back when $10,000 was a lot of money in 1933. So the Bullion 140 00:17:03.820 --> 00:17:09.980 Depository at Fort Knox was built to store all the gold that FDR took from everybody. 141 00:17:09.980 --> 00:17:12.820 So that's, you know, you hear about, oh, there's gold in Fort Knox. They had to build that 142 00:17:12.820 --> 00:17:19.980 because to steal everyone's gold, you've got to put it somewhere, right? So, they, and 143 00:17:19.980 --> 00:17:27.180 then from 33 to 34, there was a, FDR was fixing the price of gold, and there were some funny 144 00:17:27.180 --> 00:17:31.020 anecdotes that I have in my depression book about his advisors coming in and saying, what's 145 00:17:31.020 --> 00:17:35.660 the price of gold going to be today? And FDR just picking a number that involved a seven. 146 00:17:35.660 --> 00:17:39.280 And he said, oh, because it's a lucky number. And the advisor in his diary said, if the 147 00:17:39.280 --> 00:17:42.480 The public knew how we were fixing the price of gold, they would be horrified, right? 148 00:17:42.480 --> 00:17:43.880 So there's some weird stuff. 149 00:17:43.880 --> 00:17:48.960 But then after World War II, we were on the gold exchange standard Bretton Woods system 150 00:17:48.960 --> 00:17:55.400 where other central banks, not US citizens, but other central banks could turn in dollars 151 00:17:55.400 --> 00:17:58.320 the rate of $35 for an ounce of gold. 152 00:17:58.320 --> 00:18:02.920 And that was true until 1971, when Richard Nixon even ended that. 153 00:18:02.920 --> 00:18:03.920 And he said, you know what? 154 00:18:03.920 --> 00:18:04.920 Forget that. 155 00:18:04.920 --> 00:18:07.320 You know, the dollar's backed up by nothing now. 156 00:18:07.320 --> 00:18:08.640 I don't care if you turn in dollars. 157 00:18:08.640 --> 00:18:10.040 and the 158 00:18:10.040 --> 00:18:11.040 private forum. 159 00:18:11.040 --> 00:18:12.040 Okay, they could? 160 00:18:12.040 --> 00:18:13.040 Okay, great. 161 00:18:13.040 --> 00:18:16.800 I wasn't sure of the private forums, but yeah. 162 00:18:16.800 --> 00:18:19.960 So the US citizens couldn't do it all in this period. 163 00:18:19.960 --> 00:18:22.680 Central banks up and through 71. 164 00:18:22.680 --> 00:18:26.680 And this is now here, the point of this chart, consumer price index. 165 00:18:26.680 --> 00:18:31.100 So you can see, you know, prices went up here. 166 00:18:31.100 --> 00:18:32.100 They're pretty stable up. 167 00:18:32.100 --> 00:18:34.040 They came down a little bit in the early stages of the depression. 168 00:18:34.040 --> 00:18:36.160 Okay, I'm okay, okay. 169 00:18:36.160 --> 00:18:43.040 And then right in 1971 when Nixon formally untied the dollar from any tide of gold, 170 00:18:43.040 --> 00:18:46.520 you can just see how much inflation took off, price inflation. 171 00:18:46.520 --> 00:18:53.520 So especially for people my age and younger, and don't let my hairline fool you, I'm actually 172 00:18:53.520 --> 00:18:59.560 not that old, I just have grown up thinking, oh yeah, prices always go up, that's just 173 00:18:59.560 --> 00:19:00.940 the way things are. 174 00:19:00.940 --> 00:19:03.800 But no, that wasn't the way things always were. 175 00:19:03.800 --> 00:19:18.720 If I had put this back over here, for several decades, let's say from 1830 to 1930, if you 176 00:19:18.720 --> 00:19:22.520 hit $100 in terms of what kind of goods and services could you buy with that, it was basically 177 00:19:22.520 --> 00:19:23.520 the same. 178 00:19:23.520 --> 00:19:25.760 I mean, some prices would go up, some would go down, but basically $100 bought you the 179 00:19:25.760 --> 00:19:31.440 same amount of stuff for 100 years, because again, it was tied to gold, because basically 180 00:19:31.440 --> 00:19:44.440 The theory was measuring how much could an ounce of gold buy, and there was no reason that gold should become less marketable or exchange value less against a suit or against oil or what have you. 181 00:19:44.440 --> 00:19:49.440 But then once you lost that tie, especially here when you explicitly sever it, you see. 182 00:19:49.440 --> 00:19:57.440 So what happened is because, of course, at this point onward, the government now has no fetters on it and can just print money like crazy. 183 00:19:57.440 --> 00:20:06.440 The only check on them printing money is if prices rise too much, people get mad, and some people recognize the connection. 184 00:20:06.440 --> 00:20:14.440 Okay, so if you get the general idea of what's the problem now, there's two things. 185 00:20:14.440 --> 00:20:44.440 All right. So first of all, if you bought the basic story I told you last time about what, you know, what big picture, what is the Austrian version of what happened with the housing bubble? We're going to say there was a dot-com bubble. Late 90s, you remember tech stocks were going through the roof. That burst in the early 2000s, and then you had the 9-11 attacks. So on paper, there should have been a bad recession. And yet, there wasn't. Why? Because 186 00:20:44.440 --> 00:20:47.720 Alan Greenspan cut interest rates pretty significantly. 187 00:20:47.720 --> 00:20:51.100 So here you see, here's 2000 right there. 188 00:20:51.100 --> 00:20:56.640 This is the federal funds rate, it was at 6.5% and Greenspan brought it way down and 189 00:20:56.640 --> 00:20:58.220 then brought it down even further. 190 00:20:58.220 --> 00:21:01.000 So he brought it down to 1% and it stayed there for a year. 191 00:21:01.000 --> 00:21:05.080 Okay, so you can see just historically that was a pretty low amount and then I showed 192 00:21:05.080 --> 00:21:11.840 you the red line once you adjust for price inflation it was really low, at least since 193 00:21:11.840 --> 00:21:13.440 the late 1970s. 194 00:21:13.440 --> 00:21:21.440 Okay, so, but in terms of just the absolute number, without looking at price inflation, this was as low as it had been since World War II, basically. 195 00:21:21.440 --> 00:21:27.440 So, the Austrian story is that's what fueled the housing bubble. 196 00:21:27.440 --> 00:21:33.440 I mean, there are other stuff going on, too. Fannie and Freddie, obviously people in the private sector made mistakes. 197 00:21:33.440 --> 00:21:39.440 You know, the Austrians don't think everything's blamed on the government. There were people who made foolish mistakes in the private sector, too. 198 00:21:39.440 --> 00:21:46.040 to do, but the point is in terms of what fueled this orgy of this huge speculative bubble, 199 00:21:46.040 --> 00:21:49.200 they're going to say this had a lot to do with it, and then you see once they started 200 00:21:49.200 --> 00:21:54.760 raising interest rates, that's when the bubble eventually burst. 201 00:21:54.760 --> 00:21:59.320 So the basic Austrian story there is going to say Greenspan was not the maestro. 202 00:21:59.320 --> 00:22:03.320 He didn't do us any favors by bringing interest rates down. 203 00:22:03.320 --> 00:22:06.560 All he did was postpone the reckoning and made it that much worse. 204 00:22:06.560 --> 00:22:11.400 In other words, in the fall of 08, when the world seemed like it was ending in the financial 205 00:22:11.400 --> 00:22:16.880 sector, people would have looked back with nostalgia on the dot-com bursting. 206 00:22:16.880 --> 00:22:19.640 And they would have said, if only we had just sucked it up and gone through that recession 207 00:22:19.640 --> 00:22:24.680 back in the early 2000s, instead of pumping up the housing bubble and postponing the Day 208 00:22:24.680 --> 00:22:26.080 of Reckoning. 209 00:22:26.080 --> 00:22:29.520 So if that's true, well then look at what Bernanke's done. 210 00:22:29.520 --> 00:22:34.960 He's pushed interest rates down to basically zero and held them there for much longer than 211 00:22:34.960 --> 00:22:45.840 Green Span did that and so the concern is what if this right now is actually the calm 212 00:22:45.840 --> 00:22:50.940 before the storm, that this is like the housing bubble years but the bubble is maybe in bonds 213 00:22:50.940 --> 00:22:56.640 or in some other area that we're not sure, okay, that maybe there's going to be a bigger 214 00:22:56.640 --> 00:23:03.880 crisis in 2013 and can you imagine if at that time we're looking back at 2008 and saying 215 00:23:03.880 --> 00:23:05.880 The Theory of Money and Credit 216 00:23:33.880 --> 00:23:55.880 on the financial system compared to what Greenspan did. If you look at the actual money supply, look at this one. So this is the monetary base. That refers to the amount of bank reserves and currency that's in circulation. 217 00:23:55.880 --> 00:24:09.880 Okay, so it doesn't include checking account balances, if you care about the definitions, but this is basically the single metric in terms of what can the Fed directly control with its buying and selling of assets, it's the monetary base. 218 00:24:09.880 --> 00:24:16.880 Alright, so as you can see, it was pretty low for a long time, it starts coming up rising here. 219 00:24:16.880 --> 00:24:23.880 Rising here, this little blip right there, that was what Burt Greenspan did because of the 9-11 attacks. 220 00:24:23.880 --> 00:24:29.880 That he was worried that the people were going to try to take their money out of the financial system, so he flooded the economy with liquidity. 221 00:24:29.880 --> 00:24:34.880 There were people freaking out about that, saying, whoa, you can't put that much money, you're going to mess things up. 222 00:24:34.880 --> 00:24:37.880 And then, you know, some were saying that, oh, I'm sorry, I'm off by ear. 223 00:24:37.880 --> 00:24:41.880 This is, this was because the dot com, or the Y2K, right? 224 00:24:41.880 --> 00:24:43.880 This is right before, sorry about that. 225 00:24:43.880 --> 00:24:53.880 So this is, he was worried because the people were freaking out about, remember, the Y2K switchover, that people were going to just take all their money out of the banking system. 226 00:24:53.880 --> 00:24:59.880 So he was flooding it with liquidity to make sure there was no question about checks cashing and clearing working. 227 00:24:59.880 --> 00:25:06.880 And then some people say that that actually fueled the dot com bubble at that time and that was part of what happened there. 228 00:25:36.880 --> 00:25:51.880 The gas prices went up to $6 or $8 a gallon, right? So what's going on here? This money, you may have heard people talking about this, these are largely the reserves. This increase is mostly sitting in the banking sector. 229 00:25:51.880 --> 00:26:04.880 Okay, so what happened is Bernanke basically wrote checks on thin air, bought mortgage-backed securities and other things that, had they been valued at their market prices at the time, a lot of these major investment banks would have been insolvent. 230 00:26:04.880 --> 00:26:20.880 They would have all failed, just like Lehman had gone under. So how to avoid that, Bernanke starts, he did all sorts of things, like short-term swaps and things, but part of what he did also was just literally buy hundreds of billions of dollars worth of this stuff off their books 231 00:26:20.880 --> 00:26:50.880 at par basically and giving them a higher price than they would have gotten if they had to sell it to someone in the private sector, putting on the Fed's balance sheet and instead, so now these banks who originally might have had $100 billion in mortgage-backed securities where people are defaulting and not sending in their mortgage payments, they give it to the Fed and they get a $100 billion check written on the Fed and they just sit on that. So now they have $100 billion in reserves electronically with the Federal Reserve. So they have the legal ability to make new loans based 232 00:26:50.880 --> 00:26:58.880 Are you surprised that they were giving money to Verizon and Harley-Davidson just came out two days ago? 233 00:27:20.880 --> 00:27:47.880 The Federal Reserve is technically not part of the government. It's a central bank. It's basically a cartel enforced by government regulations, but it's owned by private shareholders. 234 00:27:47.880 --> 00:27:55.040 Technically, it's not part of the government. It's this independent thing, legally speaking. 235 00:27:55.040 --> 00:27:59.820 So when Bernanke's doing all this stuff, for example, AIG, remember that giant insurer 236 00:27:59.820 --> 00:28:05.120 got in trouble, and the Fed initially bailed out with 85 billion. And so they had a meeting 237 00:28:05.120 --> 00:28:10.720 and Barney Frank was apparently there, who was a big congressman, and apparently asked 238 00:28:10.720 --> 00:28:16.920 Bernanke, do you have 85 billion? And Bernanke said, I have 850 billion. And Barney Frank 239 00:28:16.920 --> 00:28:22.960 I think Barney Frank was still of the mentality that he's working for Congress and we spend 240 00:28:22.960 --> 00:28:27.400 a lot of money but we have to get it from somewhere and I don't think it hit him that 241 00:28:27.400 --> 00:28:30.680 when Bernanke, what does it mean to say to Bernanke, do you have 85 billion? He actually 242 00:28:30.680 --> 00:28:35.120 has 850 quadrillion. He's got as much, he can just buy whatever he wants technically. 243 00:28:35.120 --> 00:28:40.200 The only thing that would happen is the dollar would, prices would go up. And then another 244 00:28:40.200 --> 00:28:45.820 issue is they called Bernanke before, I don't remember which subcommittee it was, but some 245 00:28:45.820 --> 00:28:57.580 In December of 2008, Bernanke was given billions of dollars to these various investment banks. 246 00:28:57.580 --> 00:29:01.940 They said, we're not second-guessing what you're doing, but can you give us a list of 247 00:29:01.940 --> 00:29:05.180 which banks you're bailing out and how much you're giving to them? 248 00:29:05.180 --> 00:29:07.980 And Bernanke said, no, I can't do that because that would defeat the purpose of the program. 249 00:29:07.980 --> 00:29:12.300 If I were to tell you which banks are in trouble and that I'm bailing out, investors would 250 00:29:12.300 --> 00:29:38.920 The Federal Reserve Now is Considered this Independent Mighty Thing in its Own Right 251 00:29:38.920 --> 00:29:43.920 The Federal Government can't do it now. It's up to Bernanke to save the day. 252 00:29:43.920 --> 00:29:49.920 So again, this right here, these are reserves just sitting in the banking system. 253 00:29:49.920 --> 00:29:53.920 They have the legal ability to make loans on top of that. 254 00:29:53.920 --> 00:29:59.920 So if the economy were normal, and interest rates were 8% or whatever, 255 00:29:59.920 --> 00:30:07.920 and banks all of a sudden had over a trillion dollars in excess reserves just sitting there, 256 00:30:07.920 --> 00:30:11.920 They could legally go out and make loans of up to 10 trillion more. 257 00:30:11.920 --> 00:30:14.920 Okay, so I ran the numbers just to get a back of the envelope calculation. 258 00:30:14.920 --> 00:30:17.920 I did this like a year ago. I think the numbers haven't moved too much since then. 259 00:30:17.920 --> 00:30:22.920 But it's that there's, legally speaking, if the banks lent out all that money 260 00:30:22.920 --> 00:30:26.920 and create as much new money as we talked about in the little example of making a car loan, 261 00:30:26.920 --> 00:30:34.920 if they went ahead and did that, then there's enough money waiting in the wings, so to speak, 262 00:30:34.920 --> 00:30:38.920 to make the overall money supply go up by about a factor of five. 263 00:30:38.920 --> 00:30:42.920 Okay, so, you know, gasoline's three dollars a gallon now. 264 00:30:42.920 --> 00:30:47.920 Say gasoline would be fifteen dollars a gallon. So I'm not, I'm not predicting that's going to happen. 265 00:30:47.920 --> 00:30:52.920 I'm just trying to get you to see why so many economists are horrified by this picture. 266 00:30:52.920 --> 00:30:58.920 That they're going to need to undo this at some point because if they just let it sit like that, 267 00:30:58.920 --> 00:31:02.920 eventually if the economy pulls out of this, they've pumped in so much money that, you know, 268 00:31:32.920 --> 00:31:37.480 In the 70s onward, there was a sharp appreciation of the dollar against most other currencies, 269 00:31:37.480 --> 00:31:43.360 but then since basically Greenspan started lowering interest rates, you see there has 270 00:31:43.360 --> 00:31:45.160 just been this pronounced decline. 271 00:31:45.160 --> 00:31:51.320 It spiked up during the panic of 2008, but now it's resumed falling again. 272 00:31:51.320 --> 00:31:58.000 So you see this general decline in the purchasing power of the dollar against other currencies, 273 00:31:58.000 --> 00:32:05.040 And, you know, again, a lot of us are just concerned here about that last slide in particular. 274 00:32:05.040 --> 00:32:08.800 They created a bunch, and it looks like that's Bernanke's solution. 275 00:32:08.800 --> 00:32:11.160 Whenever he hits a bump in the road, what does he do? 276 00:32:11.160 --> 00:32:13.720 Let's just create a few hundred more billion dollars. 277 00:32:13.720 --> 00:32:19.800 And so the, let me just, the sort of thing I'm worried about, the official story, if 278 00:32:19.800 --> 00:32:22.920 you asked Ben Bernanke, or you asked somebody who thinks this is the right thing to do, 279 00:32:22.920 --> 00:32:27.360 if you said, well, how, what are we going to do about this, he's going to say, well, 280 00:32:27.360 --> 00:32:31.920 That's going to naturally unwind. When the economy starts recovering, interest rates 281 00:32:31.920 --> 00:32:37.360 start rising, inflation expectations pick up, banks start lending that money out again. 282 00:32:37.360 --> 00:32:41.240 We'll just suck this all back out, right? The Fed will just undo everything it did before 283 00:32:41.240 --> 00:32:44.560 so it'll start selling off mortgage backed securities, it'll start selling off government 284 00:32:44.560 --> 00:32:51.760 bonds, undoing this, it'll destroy reserves and bring that chart back down. One kink though 285 00:32:51.760 --> 00:32:57.120 in that is suppose what happens is, let's say China announces, we're not going to buy 286 00:32:57.120 --> 00:33:27.120 What does that mean? That means bond prices would fall. That's what it means if interest rates spike. So it's possible that the Fed right now sitting on a huge portfolio of government bonds, if it loses 30% in value overnight because of a dollar crash, even if he sold off everything and sucked reserves out, he wouldn't be able to suck as many reserves out as he had pumped in, right? Because, loosely speaking, let's just say that the Fed is going to lose 30% in value overnight because of a dollar crash. 287 00:33:27.120 --> 00:33:30.600 Let's say there's $600 billion in quantitative easing. Let's say he buys $600 billion right 288 00:33:30.600 --> 00:33:35.560 now of government bonds, but then the dollar crashes and those bonds fall to value of $400 289 00:33:35.560 --> 00:33:41.320 billion. Even if he sells them all, there's still $200 billion in excess reserves that 290 00:33:41.320 --> 00:33:46.680 he can't suck out anymore, right? Because he lost market value on the assets he was 291 00:33:46.680 --> 00:33:52.520 going to use to unwind it. So that's the sort of thing that I'm concerned about is if this 292 00:33:52.520 --> 00:33:58.680 scenario that we're talking about comes true that their plan for unwinding all this and 293 00:33:58.680 --> 00:34:00.960 just undoing it isn't going to work. 294 00:34:00.960 --> 00:34:04.280 And so that's what makes me a little bit nervous. 295 00:34:04.280 --> 00:34:05.280 All right. 296 00:34:05.280 --> 00:34:09.660 So why don't I stop there on that pleasant note and turn it over to your guys' questions. 297 00:34:09.660 --> 00:34:13.000 We've got, so we're going until two, right? 298 00:34:13.000 --> 00:34:14.000 Yeah. 299 00:34:14.000 --> 00:34:17.600 So we've got up to 19 minutes of fun-packed questions. 300 00:34:17.600 --> 00:34:18.600 Yeah. 301 00:34:18.600 --> 00:34:32.320 Okay, so I wish I don't have the actual slide to show you. Let me repeat. This is when people say, 302 00:34:32.320 --> 00:34:38.240 oh, what did Bernanke do with the money supply? It depends. What do you mean by that phrase money 303 00:34:38.240 --> 00:34:45.440 supply? Okay, so this is the measurement of the very narrow measure of the reserves that the 304 00:34:45.440 --> 00:34:51.760 the commercial banks have, and it's also the paper that's in your wallets, but it's not 305 00:34:51.760 --> 00:34:57.080 measuring your checking account balances with banks. That's called M1, and everyone has 306 00:34:57.080 --> 00:35:02.480 some other things in it too. So M1, if I plotted that, does not look like this. M1 went up, 307 00:35:02.480 --> 00:35:06.240 but not nearly as much as this. So in terms of the amount of money that the public is 308 00:35:06.240 --> 00:35:10.840 holding, the chart's not nearly as scary. The reason this is scary is because this could 309 00:35:10.840 --> 00:35:17.320 lead to if banks start lending this stuff out by making loans, then the amount of M1 310 00:35:17.320 --> 00:35:23.400 would go through the roof too. So partly why you haven't seen gas go up to 15 dollars a 311 00:35:23.400 --> 00:35:28.560 gallon and so forth is that the public doesn't have its hands in this money. But another 312 00:35:28.560 --> 00:35:35.320 factor is what he's bringing up is that even if the supply of money has increased, people 313 00:35:35.320 --> 00:35:43.140 People are hoarding it. So people are accumulating larger cash balances. They're not spending 314 00:35:43.140 --> 00:35:46.480 money as quickly. Money's not changing hands as quickly as it normally does. That's called 315 00:35:46.480 --> 00:35:53.560 the velocity of circulation. So that is way down. The velocity of money is way down. So 316 00:35:53.560 --> 00:35:59.120 the point is that sort of offset a little bit what Bernanke has been doing. Put another 317 00:35:59.120 --> 00:36:03.120 way, if Bernanke had sat back and done nothing, prices would have crashed. And you may remember 318 00:36:03.120 --> 00:36:09.680 Over in late 2008, oil fell from, I forget how high it was, it was over 100 a barrel 319 00:36:09.680 --> 00:36:12.440 in the summer and it came way down to like 33 or something. 320 00:36:12.440 --> 00:36:18.000 So commodity prices absolutely crashed, consumer prices were actually declining from month 321 00:36:18.000 --> 00:36:20.240 to month in late 2008. 322 00:36:20.240 --> 00:36:25.720 If you went to the grocery store, stuff was getting cheaper, because people again were 323 00:36:25.720 --> 00:36:32.000 hoarding money and they weren't creating enough new money to offset that tendency. 324 00:36:32.000 --> 00:36:38.520 So you're right, there is that factor involved here, but I think now as people have calmed 325 00:36:38.520 --> 00:36:42.000 down a little bit and now they just realized, okay, we're in just a bad economy in the long 326 00:36:42.000 --> 00:36:45.960 haul, but they don't think the world's going to come to an end, that's going to pick up, 327 00:36:45.960 --> 00:36:47.940 that people are going to start spending more money. 328 00:36:47.940 --> 00:36:51.920 So the problem is it can just flip like that, that once, if it does get to the situation 329 00:36:51.920 --> 00:36:55.640 where people think, uh-oh, price inflation's here, I don't want to be sitting on so much 330 00:36:55.640 --> 00:37:00.880 cash now, let me get rid of it, it's going to unwind very quickly and go from stable 331 00:37:00.880 --> 00:37:15.900 ." 332 00:37:15.900 --> 00:37:22.120 OK, speaking of which, if you take nothing else away from this, there's a funny, if you 333 00:37:22.160 --> 00:37:28.240 go to YouTube and type in Bernanke was wrong, there's this hilarious five-minute compilation 334 00:37:28.240 --> 00:37:35.800 of just clips of him on CNBC and giving Senate testimony from back to 2005 through like 2009. 335 00:37:35.800 --> 00:37:40.080 And it's just, at every stage in the crisis, just totally wrong, right? 336 00:37:40.080 --> 00:37:43.760 So in early 2005, they were, you know, it's like, what's her name, Maria Bartoloma or 337 00:37:43.760 --> 00:37:47.460 something like that, saying, you know, Mr. Bernanke, at the time he wasn't Fed Chairman, 338 00:37:47.460 --> 00:37:51.440 he was, I think, the Council of Economic Advisors to Bush, saying, you know, people are talking 339 00:37:51.440 --> 00:37:52.800 about a housing bubble, what do you think? 340 00:37:52.800 --> 00:37:55.160 And he's like, oh, there's some froth in the markets, but no, I don't think we're in a 341 00:37:55.160 --> 00:37:56.160 housing bubble. 342 00:37:56.160 --> 00:38:26.160 in 2005, so totally wrong. Later when the subprime blew up, they're asking him, do you think this is going to spread? He goes, no, no, I think it's going to be contained in the subprime. It's not really going to affect the real economy. That was totally wrong. And then it's like in, I think in 07, in like August of 07, he's testifying saying that, yeah, the economy right now is being, growth is being, there's a drag on growth because of the collapsing subprime sector and all that stuff. But we're going to work through that in 2008. It's going to be really strong. And he's saying this in late. So, I mean, even as 343 00:38:26.160 --> 00:38:34.160 As late as August of 07, he thought 2008 was going to be a good year for the economy when, of course, that was when things were really awful. 344 00:38:34.160 --> 00:38:42.160 So that's part of it, too, that you say, when he got reappointed, and I wrote some op-eds at the time on this saying, 345 00:38:42.160 --> 00:38:47.160 what more would he have to do to show he's not the person to be at the helm of the Federal Reserve 346 00:38:47.160 --> 00:38:53.160 than to have been wrong at every single stage of this crisis? But he got reappointed. 347 00:38:53.160 --> 00:38:56.160 I guess it pays to have bailed out a bunch of bankers, yep. 348 00:38:56.160 --> 00:39:07.160 In the last lecture you had a great chart, it had correlations between the upcoming presidential election and recent ones, part of this election. 349 00:39:07.160 --> 00:39:10.160 It seems to be a pretty good correlation. 350 00:39:10.160 --> 00:39:15.160 I think so bad now is that if you wanted to sell the bond, if you were elected, 351 00:39:15.160 --> 00:39:19.160 and you tried to just create more money, would it actually do any good, 352 00:39:19.160 --> 00:39:24.160 like kind of putting on the accelerator when your budget is broken and it's too far gone? 353 00:39:24.160 --> 00:39:29.160 And also, if you did do that, when would you look for the signals? 354 00:39:29.160 --> 00:39:31.160 Right. 355 00:39:31.160 --> 00:39:38.920 ______________________________________________________________________________________ 356 00:39:38.920 --> 00:39:45.040 Yeah, there's certainly is a thing called the political business cycle and people have 357 00:39:45.040 --> 00:39:50.160 done like econometric studies of that and you're right it does look like it's not just 358 00:39:50.160 --> 00:39:54.140 randomly dispersed that it looks like the gas is put on right before an election and 359 00:39:54.140 --> 00:40:04.220 One could argue even with this last one, technically they announced the QE2, they started making 360 00:40:04.220 --> 00:40:07.700 hints in the summer, and they said, oh, we're going to do it the day after the election, 361 00:40:07.700 --> 00:40:10.940 we're going to announce how big it's going to be. 362 00:40:10.940 --> 00:40:13.820 The official cover story was, well, see, we're not being political, we're doing it the day 363 00:40:13.820 --> 00:40:18.540 after the election, but the dollar was sinking against other currencies that was actually 364 00:40:18.540 --> 00:40:23.220 helping exporters, the stock market, I don't have the chart to show you, but the stock 365 00:40:23.220 --> 00:40:53.220 The stock market came way up since the summer so it's just the market expecting something is enough to get it going so I'm not sure to answer your question I would need to look at the numbers and try to come up with something but it's if if you looked at the chart of the S&P 500 it's you know Obama gets elected and then and then it's still plummeting and then in March of 2009 366 00:41:23.220 --> 00:41:26.740 are right here and they get it first and the government is here and they get it early in 367 00:41:26.740 --> 00:41:30.700 line and then, you know, widows getting social security checks are way down at the end of 368 00:41:30.700 --> 00:41:35.060 the line and so they see their prices go up before they get that new money. 369 00:41:35.060 --> 00:41:39.600 So I'm not really sure how to answer your question but definitely they could at least 370 00:41:39.600 --> 00:41:45.240 pump up the stock market and make people on the investment side feel like, okay, things 371 00:41:45.240 --> 00:41:50.340 are looking up if they announced another round of quantitative easing. 372 00:41:50.340 --> 00:41:55.140 They'd have to wait, because like you say, it's, you couldn't have a good economy early 373 00:41:55.140 --> 00:41:56.860 on because people wouldn't get used to it. 374 00:41:56.860 --> 00:42:00.620 So yeah, like if they announced it a few months, basically what they did this time, I think 375 00:42:00.620 --> 00:42:03.900 they had to start announcing it like in August and just start leaking things out and making 376 00:42:03.900 --> 00:42:06.460 it more and more, like how much is it going to be, maybe it'll be a trillion, maybe it'll 377 00:42:06.460 --> 00:42:11.100 be 800 billion, you know, and that's the way they sort of goose the stock market. 378 00:42:11.100 --> 00:42:16.840 As far as the unemployment benefits, or the unemployment rate, I think one way they can 379 00:42:16.840 --> 00:42:24.540 Tinker with that is messing with the unemployment benefits and that it's paradoxically the way 380 00:42:24.540 --> 00:42:28.240 you would actually get the unemployment rate to fall would be to cut off the benefits and 381 00:42:28.240 --> 00:42:32.120 it's, you know, there's plenty of like the actual recent Nobel Prize winners that was 382 00:42:32.120 --> 00:42:36.300 part of their work was showing it's pretty intuitive that if you're someone looking for 383 00:42:36.300 --> 00:42:40.400 work and you have a few really awful offers but you're holding out for a better position, 384 00:42:40.400 --> 00:42:43.160 the thing that allows you to persist and say, well, I'm not going to go work at McDonald's, 385 00:42:43.160 --> 00:42:46.280 I'm holding out because I'm an engineer or something is going to be if you're getting 386 00:42:46.280 --> 00:42:51.200 checks in the mail, and just statistically, if they stop paying people, some of them are 387 00:42:51.200 --> 00:42:57.200 going to go back to work taking miserable jobs, and so, it's, if they wanted to actually 388 00:42:57.200 --> 00:43:01.160 get the unemployment rate to fall, they could stop extending the benefits, but they would 389 00:43:01.160 --> 00:43:04.400 probably want to do it several months out so people wouldn't just get cut off and then 390 00:43:04.400 --> 00:43:09.960 go vote and say, oh, I'm not voting for that guy, he just cut off my benefits. Other questions? 391 00:43:09.960 --> 00:43:35.960 I have a question, but I need to ask this one first, because I want to say this is a question I've been doing for a long time, and the leadership did it the rest of the time, and he said that China didn't roll over the death of Barry Hayek and the Trump dollar point. He says that the federal government, they don't have a Trump dollar sitting around, and they would have to, you know, Bernanke would have to create more. 392 00:43:39.960 --> 00:44:09.960 It's like a trillion dollars. I don't remember the exact number. So it's when they talk about that, it's not that they're literally sitting on green pieces of paper. They're obviously sitting on Treasury securities, bonds. So the problem everyone's talking about is what if they stop buying new bonds, having their stockpile grow. But as Schiff is mentioning, forget that. What if they just stop buying altogether? And then as these things mature, they just let it actually shrink so that they're not rolling over the principle. 393 00:44:09.960 --> 00:44:39.960 And this is related to part of the problem with what the Fed is doing now with this quantitative easing, is they're buying longer-term government debt, okay, so it's specifically five-year securities, and so what's happening is, if you are into this stuff, but the maturity on the outstanding treasury debt is now, or the duration is lower, okay, so 394 00:44:39.960 --> 00:44:43.880 So in other words, the composition, so it's not just saying, hey, what's the federal debt 395 00:44:43.880 --> 00:44:44.880 right now? 396 00:44:44.880 --> 00:44:47.260 What is it, like, 13-some trillion dollars? 397 00:44:47.260 --> 00:44:51.960 The composition of it has changed recently, that now it's more in terms of short-term 398 00:44:51.960 --> 00:44:52.960 debt. 399 00:44:52.960 --> 00:44:53.960 And that's fine. 400 00:44:53.960 --> 00:44:57.240 If interest rates stay like this for the next 10 years, because it's, you can borrow more 401 00:44:57.240 --> 00:45:00.660 cheaply at a lower interest rate if it's shorter, right, because they can borrow basically at 402 00:45:00.660 --> 00:45:05.520 almost zero if they do three months, whereas if they, you know, borrow at 10 years, it's 403 00:45:05.520 --> 00:45:06.520 a higher interest rate. 404 00:45:06.520 --> 00:45:09.440 But the problem is, is there a role in that stuff over? 405 00:45:09.440 --> 00:45:14.200 So now if interest rates rise, they have to roll over a lot higher percentage of the outstanding 406 00:45:14.200 --> 00:45:19.480 debt right away, that they're going to be caught with their pants down, so to speak. 407 00:45:19.480 --> 00:45:25.520 So I think that all ties into what he's talking about. 408 00:45:25.520 --> 00:45:29.560 Things could get really ugly really fast because right now they've positioned themselves that 409 00:45:29.560 --> 00:45:35.040 if things just are like this and the projections play out the way their economic forecast predict, 410 00:45:35.040 --> 00:45:38.280 they'll be okay and unemployment's going to be high for the next several years and we'll 411 00:45:38.280 --> 00:45:45.280 The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit 412 00:46:08.280 --> 00:46:23.280 I bought government debt, it's not really inflationary, but the fact that it is, it's rough, isn't it? 413 00:46:38.280 --> 00:46:43.080 If the government is running big deficits, you tend to see large price inflation. 414 00:46:43.080 --> 00:46:47.440 And so people sometimes think, oh, a government deficit per se pushes up prices. 415 00:46:47.440 --> 00:46:53.160 But as Mr. Ostrowski said, that's not exactly right. 416 00:46:53.160 --> 00:46:57.040 If the government just takes in more, the government takes in a trillion dollars in 417 00:46:57.040 --> 00:47:00.960 tax revenue and wants to spend $1.1 trillion, so they need to borrow $100 billion, if they 418 00:47:00.960 --> 00:47:05.400 just borrow it from us, there's no reason for prices in general to go up, because the 419 00:47:05.400 --> 00:47:07.440 government spends more, but we spend less. 420 00:47:07.440 --> 00:47:12.140 There's not more dollar bills floating around because of that, just like if IBM wants to 421 00:47:12.140 --> 00:47:17.640 build a new factory and issues bonds and borrows money from people in the private sector, that 422 00:47:17.640 --> 00:47:19.800 just changes the composition of the spending, right? 423 00:47:19.800 --> 00:47:24.560 You spend less than going out to eat or whatever and IBM spends more and it's building a factory. 424 00:47:24.560 --> 00:47:30.340 But when the loan is coming from the Fed, basically, they're creating new dollar bills. 425 00:47:30.340 --> 00:47:34.160 That's where Bernanke's getting the money to lend to people, it just creates that thinner. 426 00:47:34.160 --> 00:47:47.160 We had a real estate bubble, but there was also a real estate bubble throughout the world. What would be the Austrian explanation for that? 427 00:48:04.160 --> 00:48:08.160 How can that be Greenspan's fault? 428 00:48:08.160 --> 00:48:12.160 So one thing is there are some other countries were pegged to the dollar and this came up earlier 429 00:48:12.160 --> 00:48:16.160 that other countries that were pegged like by Greenspan 430 00:48:16.160 --> 00:48:20.160 inflating the dollar would have normally fallen against their currencies but 431 00:48:20.160 --> 00:48:24.160 because they didn't want that to happen they printed more to offset it 432 00:48:24.160 --> 00:48:28.160 so that's one issue and unfortunately 433 00:48:28.160 --> 00:48:32.160 I did see that I came across some fact that I hadn't realized before to 434 00:48:32.160 --> 00:48:57.160 The Fed in effect has been, and is, the world's central bank, which actually is true, as true as it was all the time, Ludwig and Mises long since collapsed without it being treated as a reserve by other central banks all over the globe. 435 00:48:57.160 --> 00:49:24.160 So, as the Fed prints more dollars, what are called reserves, now they're not actually reserves, the language is retained, but as the Fed prints more dollars, these dollars end up at the call of the vaults of the world's other central banks, and because they are in quotation marks, reserves, they are in a position themselves to turn out to be like their own currency. 436 00:49:24.160 --> 00:49:31.520 So that has been a part of where that basically is why the world's financial system is so 437 00:49:31.520 --> 00:49:37.600 complicated at this point that, you know, you get a bubble one place and very easy to 438 00:49:37.600 --> 00:49:40.960 transfer it somewhere else. 439 00:49:40.960 --> 00:49:44.720 I really think that thieves are everywhere. 440 00:49:44.720 --> 00:49:51.920 Well, that's a different way of, yeah, a different way of expressing it at any point, I guess. 441 00:49:51.920 --> 00:49:53.440 Yes, sir. 442 00:49:53.440 --> 00:50:03.440 With regards to market theory, with the Austrian School, how does that relate to, say, efficient market versus free market? 443 00:50:23.440 --> 00:50:27.960 Work, and there's this school of thought coming out of the Chicago tradition called Rational 444 00:50:27.960 --> 00:50:31.280 Expectations and Efficient Markets. 445 00:50:31.280 --> 00:50:35.640 And so some of these guys, so the Austrians don't go that far, so some of these guys literally, 446 00:50:35.640 --> 00:50:41.400 Eugene Fama is one of them and I sort of made fun of him in one of my Mises articles, they, 447 00:50:41.400 --> 00:50:46.960 even after what just happened, like you saw that thing in the Las Vegas bubble that I 448 00:50:46.960 --> 00:50:50.200 showed you, or the Nevada bubble, they'd say, no, that wasn't a bubble, what are you talking 449 00:50:50.200 --> 00:50:51.200 about? 450 00:50:51.200 --> 00:50:54.400 And you say, well, what do you mean? Of course that was a bubble. What else would it be? 451 00:50:54.400 --> 00:50:57.400 And he would say, well, no, because think about it. And he'd sort of use this argument 452 00:50:57.400 --> 00:51:01.840 to say, well, let's say, it's impossible. It can't be the case that everyone in the 453 00:51:01.840 --> 00:51:06.660 market knows we're in the midst of a bubble. Because if they did, they would just sell. 454 00:51:06.660 --> 00:51:10.400 And then the bubble would disappear. So it's impossible. I mean, they dress it up with 455 00:51:10.400 --> 00:51:15.800 math, but that's their argument. That, yeah, prices can be volatile, but you can never 456 00:51:15.800 --> 00:51:20.200 know that you're in the midst of a bubble. So the Austrians, many of them don't go that 457 00:51:20.200 --> 00:51:36.480 Now, there's another, sort of the other extreme, a lot of interventionist economists subscribe 458 00:51:36.480 --> 00:51:41.720 to various models like psychological or what's called behavioral finance where they look 459 00:51:41.720 --> 00:51:48.000 at herd behavior and try to explain huge swings in the market, not on the basis of fundamentals 460 00:52:18.000 --> 00:52:21.900 The reason you had these extremes is look at what, surely it's relevant that the Federal 461 00:52:21.900 --> 00:52:25.860 Reserve is creating money and pumping into markets trying to push down interest rates. 462 00:52:25.860 --> 00:52:30.360 So it's not just all these wacky human beings when they get in the financial sector they 463 00:52:30.360 --> 00:52:31.360 start going crazy. 464 00:52:31.360 --> 00:52:35.000 It's very systematic things as to explain where these swings come from. 465 00:52:35.000 --> 00:52:36.520 So it's sort of a mix. 466 00:52:36.520 --> 00:52:40.480 But on the other hand, they're not like the Chicago school that just says efficient markets 467 00:52:40.480 --> 00:52:42.940 all the time. 468 00:52:42.940 --> 00:52:45.840 We can never know that we're in the midst of a bubble because it would get priced into 469 00:52:45.840 --> 00:52:52.320 to it, and that information gets reflected instantly. So I think the Austrians, they're 470 00:52:52.320 --> 00:52:57.220 in the middle of those two camps, so to speak. On the one hand, the Chicago School Efficient 471 00:52:57.220 --> 00:53:01.700 Markets guys, some of them literally say there's no such thing as a bubble, that's impossible. 472 00:53:01.700 --> 00:53:06.000 Whereas a lot of the Keynesian behavioral finance guys just think that there's bubbles 473 00:53:06.000 --> 00:53:10.480 all over the place and we need a strong SEC or otherwise these nut jobs on Wall Street 474 00:53:10.480 --> 00:53:14.360 will just always have crashes every few years. Yeah? 475 00:53:14.360 --> 00:53:15.360 Mm-hm. 476 00:53:15.360 --> 00:53:16.360 Right. 477 00:53:16.360 --> 00:53:31.900 Yeah, that was certainly an aspect. 478 00:53:31.900 --> 00:53:39.860 And just so you guys know, to understand the intellectual mistake, how was it that so many 479 00:53:39.860 --> 00:53:44.000 smart people with billions of dollars on the line — why were these banks making these 480 00:54:14.000 --> 00:54:19.000 They would say, like, oh, well, they follow a stochastic process, and it's this kind of a distribution. 481 00:54:19.000 --> 00:54:21.000 But they were independent variables. 482 00:54:21.000 --> 00:54:28.000 So in other words, real estate prices in Las Vegas was one thing, and it had a mean of this, and this was the distribution, and so forth. 483 00:54:28.000 --> 00:54:32.000 And then in California, they had another thing to show California home prices. 484 00:54:32.000 --> 00:54:34.000 And so they had all these independent variables. 485 00:54:34.000 --> 00:54:38.000 And so they would say, you know, we looked at the data historically going back 100 years. 486 00:54:38.000 --> 00:54:43.000 The chance of a real estate market dropping 10% in one year is such and such. 487 00:54:43.000 --> 00:54:47.040 and put that in the model, but then the chance of that happening in 100 different real estate 488 00:54:47.040 --> 00:54:51.080 markets simultaneously is that number raised to the 100th power, in their mind, because 489 00:54:51.080 --> 00:54:54.480 they thought they were independent events, because they thought real estate's local. 490 00:54:54.480 --> 00:54:57.600 And so that's why they gave such a high rating, because what these mortgage-backed securities 491 00:54:57.600 --> 00:55:02.960 were, you would buy, let's say, 1,000 mortgages from all over the country, put them into a 492 00:55:02.960 --> 00:55:06.760 pool and then slice and dice that thing and sell it off to people. 493 00:55:06.760 --> 00:55:09.600 So you weren't owning a mortgage from Joe Smith. 494 00:55:09.600 --> 00:55:33.600 They were saying you were the worst of them? 495 00:55:33.600 --> 00:55:35.600 They were saying you were the worst of them? 496 00:55:39.600 --> 00:56:09.080 And that's all the time we have for today. 497 00:56:09.080 --> 00:56:39.080 I mean, in all seriousness, I give a real generic stuff, because obviously, if you say something specific, it's going to be wrong, but in terms of people saying, what do we do, my general advice to people is try to get more income streams going, especially if someone just works for a company, don't just think, well, I better not get laid off or I'm dead, whatever it is, if you always want to start walking dogs on Saturdays, 498 00:57:09.080 --> 00:57:14.800 I think the economy is going to be bad in the midst of possibly very large price inflation. 499 00:57:14.800 --> 00:57:18.080 So like what would be a good thing? I wouldn't want to own a high-end jewelry store because 500 00:57:18.080 --> 00:57:22.520 no one's probably going to be buying fancy jewelry if unemployment is 20% because a lot 501 00:57:22.520 --> 00:57:26.280 of people can't afford it and then even rich people don't want to get mugged, right? So 502 00:57:26.280 --> 00:57:29.520 they don't want to be ostentatious in that kind of environment. But like low in- 503 00:57:29.520 --> 00:57:30.680 Paper and whiskey? 504 00:57:30.680 --> 00:57:36.200 There you go. But you also want income too. You want something that responds, that you 505 00:57:36.200 --> 00:57:43.580 and Research. So like lower middle class housing units I think would be something. If you could 506 00:57:43.580 --> 00:57:47.280 be a landlord and you owned that and you had a fixed rate mortgage so you could earn an 507 00:57:47.280 --> 00:57:52.760 income and if prices double in five years you could just raise your rents. I mean that's 508 00:57:52.760 --> 00:57:57.680 the kind of thing. Right, so that's what I'm saying. You don't want to get like this luxury 509 00:57:57.680 --> 00:58:01.860 apartment but people got to live somewhere, right? So I mean no matter what you do, there's 510 00:58:01.860 --> 00:58:05.860 There's always, if you buy gold, you say, well, they could confiscate the gold. Look, they did it in 1933. 511 00:58:05.860 --> 00:58:13.860 So no matter what you do, it's hard to put, but I'm just trying to think of, you want to have streams of income that come in that can respond quickly in case prices go up, 512 00:58:13.860 --> 00:58:21.860 but also industries or sectors that will do okay even if there's an awful, awful economy. 513 00:58:21.860 --> 00:58:26.860 So, yes. All right. With that happy thought, thanks everyone.