WEBVTT NOTE Chapter 2: A Secret History of the Boom and Bust 1 00:00:00.000 --> 00:00:04.580 A Secret History of the Boom and Bust This text is drawn from the keynote address 2 00:00:04.580 --> 00:00:11.860 at the Sage Capital Management Conference in Houston, Texas, March 12, 2003. 3 00:00:11.860 --> 00:00:17.360 The Austrian economists tell us that a price is more than a price. It is an objective expression 4 00:00:17.360 --> 00:00:22.800 of subjective judgments concerning human wants now and in the future. It conveys information 5 00:00:22.800 --> 00:00:27.580 to us about how we ought to conduct ourselves, where capital should be directed, how much 6 00:00:27.580 --> 00:00:33.780 Which of what should be consumed now or later, which jobs to take and which to pass over? 7 00:00:33.780 --> 00:00:39.980 In short, prices provide the roadmap to the successful navigation of the material world. 8 00:00:39.980 --> 00:00:45.040 How striking it is to see stock prices respond so actively to the war on Iraq, the dominant 9 00:00:45.040 --> 00:00:49.860 event of the day. Since the war began, prices rose in response to the prospect that the 10 00:00:49.860 --> 00:00:55.340 war would end soon and sank on the prospect that the war will go on and on. What does 11 00:00:55.340 --> 00:01:00.500 What does this price information convey? Most likely, it reflects it in co-ed sense that 12 00:01:00.500 --> 00:01:05.540 this war would do nothing to bring us out of economic contraction and into recovery. 13 00:01:05.540 --> 00:01:10.680 That is precisely true. Wars often result in severe setbacks, not only prolonging the 14 00:01:10.680 --> 00:01:16.220 contraction but deepening it as well. To hear official voices talk, however, we have not 15 00:01:16.220 --> 00:01:20.060 been going through the longest recession in the post-war period. Instead, we have been 16 00:01:20.060 --> 00:01:27.260 through a 24-month slow recovery. It is also called a sagging economy with sound fundamentals. 17 00:01:27.260 --> 00:01:32.740 Greenspan has made references to a soft patch in a foundation supposedly as hard as stone. 18 00:01:32.740 --> 00:01:37.180 Indeed, in the effort to avoid using the term recession, the Federal Reserve has become 19 00:01:37.180 --> 00:01:42.820 a business cycle phrase mill. Thus, according to the Fed, this is a soft economy, a subpar 20 00:01:42.820 --> 00:01:50.040 economy, a skittish economy, an economy weighted down by weak expenditures, an economy of persistent 21 00:01:50.040 --> 00:01:56.480 and weakness are my favorite and economy facing formidable barriers to vigorous expansion. 22 00:01:56.480 --> 00:02:01.760 Call it what you want, but don't call it a recession. As for the D word, depression, 23 00:02:01.760 --> 00:02:07.600 don't even think it. With the latest data on the producer price index, the commodity 24 00:02:07.600 --> 00:02:12.780 price index and the increase in oil prices, we are starting to see what other torturous 25 00:02:12.780 --> 00:02:19.540 linguistic devices are at work. It is not inflation, it is sector-specific price pressure. 26 00:02:19.540 --> 00:02:23.620 In the old days, rising unemployment, sinking production and price inflation combined to 27 00:02:23.620 --> 00:02:26.220 create what was called stagflation. 28 00:02:26.220 --> 00:02:28.020 What will it be called this time? 29 00:02:28.020 --> 00:02:30.660 Something rather ingenious, no doubt. 30 00:02:30.660 --> 00:02:35.980 The National Bureau of Economic Research officially dates the contraction from March 2001, fully 31 00:02:35.980 --> 00:02:38.660 six months before 9-11. 32 00:02:38.660 --> 00:02:42.460 Not a day has gone by in the last two years when some commentator has neither denied we 33 00:02:42.460 --> 00:02:47.060 are in a downturn, claimed we are already out of the contraction, or cited evidence 34 00:02:47.060 --> 00:02:56.220 In fact, I believe our time will be recorded as a period of general economic meltdown. 35 00:02:56.220 --> 00:03:00.740 How much worse will it get and how much longer will it last? We cannot know for sure, but 36 00:03:00.740 --> 00:03:06.580 we do know that right now the government is doing everything in its power to make it worse. 37 00:03:06.580 --> 00:03:11.260 Those of us who warned in the 1990s that the stock price mania could not last were accused 38 00:03:11.260 --> 00:03:16.060 of spreading gloom and doom. Our warnings were considered self-eminently ridiculous 39 00:03:16.060 --> 00:03:21.060 Because, of course, it was said that we were in a new economy, and such things as profitability 40 00:03:21.060 --> 00:03:25.940 and earnings and savings were old hat and had no bearing on the cyber world being created 41 00:03:25.940 --> 00:03:32.180 before our eyes. Only the Austrian School economists seemed to wonder what or who was 42 00:03:32.180 --> 00:03:37.540 behind the frenzy. In contrast to the 1980s, when everyone was watching the money supply, 43 00:03:37.540 --> 00:03:42.460 the markets were suspiciously uninterested in what the Fed was up to in the 1990s. It 44 00:03:42.460 --> 00:03:47.660 They funded a bailout of Mexico, then a bailout of East Asia, then a bailout of a crazy Connecticut 45 00:03:47.660 --> 00:03:52.040 hedge fund that believed it could predict the future by paying Nobel laureates vast 46 00:03:52.040 --> 00:03:57.440 sums to concoct a mathematical model that perfectly predicted the past. 47 00:03:57.440 --> 00:04:02.760 But still hardly anyone cared. The phrase money supply elicited yawns. The Wall Street Journal 48 00:04:02.760 --> 00:04:07.160 meanwhile ran a few articles explaining why there is no longer any such thing as risk. 49 00:04:07.160 --> 00:04:11.200 It was only the Austrians who seemed to take notice when money creation rates began to 50 00:04:11.200 --> 00:04:18.100 to take off in 1995 and climb to 15% in late 1998 and 1999, taking the bull market on 51 00:04:18.100 --> 00:04:23.840 its wildest ever ride. Monetary expansion rates settled down a bit in 2000, a trend 52 00:04:23.840 --> 00:04:28.660 which at first seemed merely inauspicious, like a tiny tap on a domino lined up against 53 00:04:28.660 --> 00:04:34.060 a thousand others. Once the bear market began, there was no turning back, no matter how much 54 00:04:34.060 --> 00:04:39.320 the Fed inflated. Instead of stabilizing down where they had in Clinton's first term, money 55 00:04:39.320 --> 00:04:44.600 Money creation rates shot up again, reaching an astounding 22% in December 2001 from a 56 00:04:44.600 --> 00:04:49.400 year earlier, and then fell back down again, creating a double-dip bear market in the course 57 00:04:49.400 --> 00:04:54.920 of a mere 24 months. In these numbers we find the secret history of the great boom and bust 58 00:04:54.920 --> 00:05:00.640 of our time. Let me give a brief outline of why and try to explain why it is that so few 59 00:05:00.640 --> 00:05:06.280 seem to pick up on it. At the dawn of the century of central banking, an economist named 60 00:05:06.280 --> 00:05:11.260 Ludwig von Mises set out to rewrite the theory of what money is and how government can seriously 61 00:05:11.260 --> 00:05:16.440 distort its workings. Among the puzzles he sought to solve was one that most economists, 62 00:05:16.440 --> 00:05:22.800 including Karl Marx, had noticed, swings in business activity from boom to bust. Marx 63 00:05:22.800 --> 00:05:27.360 said that cycles are endemic to capitalism and a sign of the final crisis that will sweep 64 00:05:27.360 --> 00:05:32.880 in the age of socialism. In contrast, Mises found that the business cycle is a symptom 65 00:05:32.880 --> 00:05:37.160 not of the free market, but of attempts to manipulate the market through unsound monetary 66 00:05:37.160 --> 00:05:42.200 practices. Moreover, he found that these cycles are self-correcting, provided that the government 67 00:05:42.200 --> 00:05:47.720 doesn't attempt to forestall the necessary correction that follows an artificial boom. 68 00:05:47.720 --> 00:05:52.000 Mises concluded by looking carefully at the relationships among the financial sector, 69 00:05:52.000 --> 00:05:57.360 money and banking, and the structure of production itself. On the free market, he said, the interest 70 00:05:57.360 --> 00:06:01.600 rate reflects the extent to which people are willing to forgo current consumption for later 71 00:06:01.600 --> 00:06:06.560 The more business and holders of money are willing to put off consumption, the lower 72 00:06:06.560 --> 00:06:11.480 the rate will be. A low borrowing rate for business, which spurs investment, reflects 73 00:06:11.480 --> 00:06:16.120 a high rate of consumer savings, which reflects a willingness of consumers to purchase the 74 00:06:16.120 --> 00:06:21.600 products made in lengthy production processes. In testimony the other day, Greenspan claimed 75 00:06:21.600 --> 00:06:26.600 the following, quote, Economists understand very little about how technological progress 76 00:06:26.600 --> 00:06:56.600 occurs. Perhaps he should have said that he greenspan knows little about how technological progress occurs. At least as regards the Austrian economists, his statement is false. Within the framework of the freedom of exchange, entrepreneurs make judgments about what consumers might want in the future, including new technologies. Capitalists and investors assume the risk, employing private property. Investments that are profitable attract more resources, and those that yield losses are shelved. 77 00:06:56.600 --> 00:07:01.320 This is the free market capital structure at work in a complex economy. 78 00:07:01.320 --> 00:07:06.160 It is truly a miracle of coordination extending through all sectors and across a huge range 79 00:07:06.160 --> 00:07:10.840 of time horizons with no central management and needing none. 80 00:07:10.840 --> 00:07:15.360 It balances human needs with the availability of all the world's resources, unleashes the 81 00:07:15.360 --> 00:07:20.400 amazing power of human creativity and works to meet the material needs of every member 82 00:07:20.400 --> 00:07:24.080 of society at the least possible cost. 83 00:07:24.080 --> 00:07:29.120 He does this through exchange, cooperation, competition, entrepreneurship, and all the 84 00:07:29.120 --> 00:07:33.760 institutions that make possible capitalism, the most productive economic system this side 85 00:07:33.760 --> 00:07:35.560 of heaven. 86 00:07:35.560 --> 00:07:40.080 This system of capital coordination not only works without central management, government's 87 00:07:40.080 --> 00:07:45.720 attempts to manage it create dislocations across sectors and across time. 88 00:07:45.720 --> 00:07:51.960 Let us never underestimate the social benefits that flow from this seemingly technical mechanism. 89 00:07:51.960 --> 00:07:56.760 The market economy has created unfathomable prosperity, and decade by decade, century 90 00:07:56.760 --> 00:08:03.760 by century, miraculous feats of innovation, production, distribution and social coordination. 91 00:08:03.760 --> 00:08:09.700 To the free market we owe all material prosperity, all leisure time, our health and longevity, 92 00:08:09.700 --> 00:08:15.760 our huge and growing population, nearly everything we call life itself. Capitalism and capitalism 93 00:08:15.760 --> 00:08:21.080 alone has rescued the human race from degrading poverty, rampant sickness and early death. 94 00:08:21.080 --> 00:08:26.620 In the absence of the capitalist economy and all its underlying institutions, the world's 95 00:08:26.620 --> 00:08:31.580 population would over time shrink to a small fraction of its current size with whatever 96 00:08:31.580 --> 00:08:36.440 was left of the human race systematically reduced to subsistence, eating only what could 97 00:08:36.440 --> 00:08:41.800 be hunted or gathered. The institution that is the source of the word civilization, the 98 00:08:41.800 --> 00:08:47.320 city, depends on trade and commerce and cannot exist without them. And this is only to mention 99 00:08:47.320 --> 00:08:52.880 and the Economic Benefits of Capitalism. It is also an expression of freedom. It is not 100 00:08:52.880 --> 00:08:57.780 so much a social system, but the natural result of a society where an individual freedom is 101 00:08:57.780 --> 00:09:02.380 respected, and where businesses, families and every form of association are permitted 102 00:09:02.380 --> 00:09:08.760 to flourish in the absence of coercion, looting and war. Capitalism protects the weak from 103 00:09:08.760 --> 00:09:13.700 the strong, granting choice and opportunity to the masses, who once had no choice but 104 00:09:13.700 --> 00:09:19.180 but to live in a state of dependency on the politically connected and their enforcers. 105 00:09:19.180 --> 00:09:23.620 But capitalism has many enemies, among them those who would attempt to gin up economic 106 00:09:23.620 --> 00:09:28.940 production through loose credit. What Mises focused on in his book on money was the effects 107 00:09:28.940 --> 00:09:33.540 of this particular attack on the free market, expansion of money and credit by the central 108 00:09:33.540 --> 00:09:38.020 bank and in particular the attempt to drive down the price of credit to spur business 109 00:09:38.020 --> 00:09:43.420 investment. Doing this through the interest rate requires injections of new money into 110 00:09:43.420 --> 00:09:49.620 to the economy. One effect of this has been known for centuries. It causes prices to rise. 111 00:09:49.620 --> 00:09:54.180 But the other effect Mises discovered. It subsidizes long-term capital investment in 112 00:09:54.180 --> 00:09:59.640 a manner that cannot be supported by the patterns of consumption and saving. As one Austrian 113 00:09:59.640 --> 00:10:04.580 economist put it, when the central bank drives down interest rates, it causes the economy 114 00:10:04.580 --> 00:10:09.780 to bite off more than it can chew. The effect of artificially inflating the economy can 115 00:10:09.780 --> 00:10:16.780 The monetary risk, for example, believe that so long as prices remain in check, there is no problem associated with money expansion. 116 00:10:16.780 --> 00:10:23.780 The supply-siders, though sound on many issues, have an unfortunate faith in the power of loose credit to make bread from stones. 117 00:10:23.780 --> 00:10:28.780 Mises developed his theory of money expansion in the late 19th century. 118 00:10:28.780 --> 00:10:33.780 It was the first study of money expansion in the late 19th century. 119 00:10:33.780 --> 00:10:44.780 Mises developed his theory throughout the 1920s and warned of the coming 1929 stock market crash. 120 00:10:44.780 --> 00:10:51.780 His work was carried forward by F. A. Hayek throughout the 1930s. Hayek later received the Nobel Prize for this. 121 00:10:51.780 --> 00:11:01.780 Indeed, the theory was widely embraced until Keynes dreamed up an alternative view that resurrected all the old fallacies about the miracles of money creation and centralized economic management. 122 00:11:01.780 --> 00:11:06.780 Then the Misesian theory languished for decades until the current downturn. 123 00:11:06.780 --> 00:11:13.780 Today it is getting new attention as the leading explanation of the insanity of the late 1990s and the current bust. 124 00:11:13.780 --> 00:11:18.780 Only the Austrians said all along that reality would strike back. 125 00:11:18.780 --> 00:11:29.780 The Fed and the administration have worked ever since, using the only tools that they have, regulation, spending and credit expansion, to reverse the course of the recession. 126 00:11:29.780 --> 00:11:43.780 When I think of the Fed spreading money far and wide, I think of the government in Huxley's brave new world handing out soma pills or spreading soma vapors to distract people from reality, drugging them so that they will be content despite the surrounding disaster. 127 00:11:43.780 --> 00:11:49.780 If they start to resist, out comes the soma until the crowds collapse in kisses and hugs. 128 00:11:49.780 --> 00:11:53.780 It is always an illusion to believe that more money is the answer. 129 00:11:53.780 --> 00:11:58.780 The federal funds rate is at a 40-year low, and that hasn't done the trick. 130 00:11:58.780 --> 00:12:06.780 During the 1990s, the Bank of Japan tried again and again to manufacture a recovery through absurdly low rates, but that didn't work either. 131 00:12:06.780 --> 00:12:14.780 There is no evidence from either theory or history that pounding interest rates into the ground can create anything resembling a sustainable prosperity. 132 00:12:14.780 --> 00:12:20.780 And yet people believe it, or want to believe it, because it seems better than the alternative. 133 00:12:20.780 --> 00:12:25.780 The entire affair illustrates the underlying reality of American political and economic life. 134 00:12:25.780 --> 00:12:31.780 The State's ability to create money and credit. All other powers of government, regulatory, 135 00:12:31.780 --> 00:12:37.780 fiscal, even military, pale in comparison to this. Despite that, the Fed is the least 136 00:12:37.780 --> 00:12:43.780 controversial institution in American political life. Apart from Ron Paul of Texas, no national 137 00:12:43.780 --> 00:12:48.780 politician understands how it works. When Greenspan comes before Congress, he is treated 138 00:12:48.780 --> 00:12:54.780 like a minor god. If this worship is ever tempered with skepticism, it is on grounds 139 00:12:54.780 --> 00:13:13.700 Mises distinguishes three varieties of inflationism, that is the demand that the state work with 140 00:13:13.700 --> 00:13:17.700 the banking industry to flood the economy with credit. 141 00:13:17.700 --> 00:13:23.000 The first is naive inflationism, which sees no real downside to monetary expansion. 142 00:13:23.000 --> 00:13:27.640 The second is inflationism intended to reward debtors at the expense of creditors, and the 143 00:13:27.640 --> 00:13:32.920 third sees disadvantages to an expansionary policy but believes that the advantages outweigh 144 00:13:32.920 --> 00:13:37.920 them. The U.S. is right now in the grip of the worst form, naive inflationism, which 145 00:13:37.920 --> 00:13:42.720 as Mises says, quote, demands an increase in the quantity of money without suspecting 146 00:13:42.720 --> 00:13:47.080 this will diminish the purchasing power of money. It wants more money because in its 147 00:13:47.080 --> 00:13:52.760 eyes the mere abundance of money is wealth. Fiat money, let the state create money and 148 00:13:52.760 --> 00:13:57.760 and make the poor rich and free them from the bonds of the capitalists." 149 00:13:57.760 --> 00:14:02.080 And here we are today enduring the longest recession in post-war history, a Nasdaq off 150 00:14:02.080 --> 00:14:08.680 75% from its highs and a Dow off 40% and the government is still issuing buy signals. 151 00:14:08.680 --> 00:14:13.160 Imagine if you had used George W. as your portfolio manager. You would have bought stocks 152 00:14:13.160 --> 00:14:18.600 when he became president, held onto them through 9-11 and then bought more and more afterwards. 153 00:14:18.600 --> 00:14:22.740 Incidentally you'll notice that the official rationale for buying stocks has changed, whereas 154 00:14:22.740 --> 00:14:27.180 Because once it was said you could buy because the economy is on a permanent growth path, 155 00:14:27.180 --> 00:14:30.740 after September 11th it was said you should buy to display your patriotism. 156 00:14:30.740 --> 00:14:35.640 If that isn't a sell signal, I don't know what is. 157 00:14:35.640 --> 00:14:38.860 Of course no one in his right mind would let the President of the United States manage 158 00:14:38.860 --> 00:14:40.660 his stock portfolio. 159 00:14:40.660 --> 00:14:45.660 Why then do we trust his government to spend wisely the 2.5 trillion dollars it will extract 160 00:14:45.660 --> 00:14:47.980 from the private economy this year? 161 00:14:47.980 --> 00:14:51.820 Of course we don't really trust the government to do that, but we do not have much choice 162 00:14:51.820 --> 00:15:03.820 The money is taken from us by force and is thereby, by definition, directed towards uses that are not those which owners would have chosen. This is power, not market, at work. 163 00:15:03.820 --> 00:15:11.820 What is striking to note, however, is that all the ways in which power is not only destructive but also ineffective against the market economy. 164 00:15:11.820 --> 00:15:16.820 The government did not know that firms such as Enron and Worldcom were unviable. 165 00:15:16.820 --> 00:15:25.820 All the regulators put together could not anticipate the consequences of what private traders alone were to discover, that these businesses had widely overextended themselves. 166 00:15:25.820 --> 00:15:36.820 Leaving aside questions of ethical lapses of these companies, the most significant lesson we should learn from their collapse is that the market economy has built within it a fabulous internal check against illusion. 167 00:15:36.820 --> 00:15:42.820 Companies that could not sustain themselves and their own merits were simply abandoned by investors. 168 00:15:42.820 --> 00:15:48.120 It counts towards the enduring shame of the Bush administration that attempted to blame 169 00:15:48.120 --> 00:15:52.540 the market for the bust of so many companies rather than having given credit to the market 170 00:15:52.540 --> 00:15:56.060 for having discovered the problem in the first place and then having done something about 171 00:15:56.060 --> 00:16:02.020 it. But as FDR demonstrated after the Depression, there are political points to be made by skewering 172 00:16:02.020 --> 00:16:07.220 the private sector in order to distract from the failures of the public sector. The alleged 173 00:16:07.220 --> 00:16:11.940 crime the Bush administration seized on was a counting fraud, even though it is not at 174 00:16:11.940 --> 00:16:16.340 It is not at all clear that what WorldCom, Enron, Computer Associates, Global Crossing 175 00:16:16.340 --> 00:16:22.060 or Quest did, often with the blessing of respected auditors, amounts to that at all. In each 176 00:16:22.060 --> 00:16:27.300 case the accusation was similar. Their books counted spending as profitable investment 177 00:16:27.300 --> 00:16:31.660 before the revenue was in the bag, and when the economic tables turned, their optimistic 178 00:16:31.660 --> 00:16:36.300 predictions proved unsound and even, in retrospect, absurd. 179 00:16:36.300 --> 00:16:39.860 WorldCom was the worst case of the bunch, which is why the government has made such 180 00:16:39.860 --> 00:17:01.860 No one disputes the facts. Worldcom's expenses for last mile leases on other companies' communications 181 00:17:01.860 --> 00:17:07.340 networks were rising very quickly. Managers wanted to move these expenses off of the profit 182 00:17:07.340 --> 00:17:11.900 and Law Statement and onto the balance sheet, thus reflecting a more profitable appearance. 183 00:17:11.900 --> 00:17:17.100 Now understand that there was no lying going on and no graft or theft or anything else 184 00:17:17.100 --> 00:17:22.160 of that nature. What we have here is an imprudent reclassification design to impress investors 185 00:17:22.160 --> 00:17:27.100 who at the height of the bubble demanded nothing less. Unless you're an accounting whiz, there 186 00:17:27.100 --> 00:17:33.140 is no way to say that this is a priori evil. In any case, it didn't fool anyone. Many skeptics 187 00:17:33.140 --> 00:17:37.500 This drew attention to the crazy finance of WorldCom's books. But in the boom times made 188 00:17:37.500 --> 00:17:42.860 possible by the Fed, most people didn't care. Most of the other cases of corporate fraud 189 00:17:42.860 --> 00:17:47.500 that came under the microscope were far less serious than WorldCom, and none are obvious 190 00:17:47.500 --> 00:17:52.940 cases of theft or fraud. Mostly it was just bad forecasting reflected on optimistic accounting 191 00:17:52.940 --> 00:17:57.500 methods. The supposed damage caused by their behavior was that their dressed up books kept 192 00:17:57.500 --> 00:18:02.620 their stock price rising even as the financial condition of the company deteriorated. That's 193 00:18:02.620 --> 00:18:06.420 That's probably true, but it's also a short description of what it means to be in a bubble 194 00:18:06.420 --> 00:18:07.420 economy. 195 00:18:07.420 --> 00:18:10.900 If this is fraud, the entire economic boom was fraud. 196 00:18:10.900 --> 00:18:14.900 Hitting closer to the truth, the New York Times called D.C.'s anti-business frenzy 197 00:18:14.900 --> 00:18:20.200 quote, the vital center of the administration's strategy for reducing the political vulnerability 198 00:18:20.200 --> 00:18:22.500 for the White House, unquote. 199 00:18:22.500 --> 00:18:26.020 In other words, the Republicans are up to their old trick of behaving even worse than 200 00:18:26.020 --> 00:18:29.220 the Democrats in order to keep the Democrats from coming to power. 201 00:18:29.220 --> 00:18:34.220 If you disagree with this approach, you must be some sort of libertarian utopian who doesn't 202 00:18:34.220 --> 00:18:37.380 understand the need for compromise. 203 00:18:37.380 --> 00:18:41.380 The underlying assumption was the view that it is always a terrible thing for a business 204 00:18:41.380 --> 00:18:44.660 to go under, when in fact it is not. 205 00:18:44.660 --> 00:18:49.520 It is merely a reflection of human preference as expressed in buying and selling decisions. 206 00:18:49.520 --> 00:18:53.940 The only alternative to going under in some cases is to operate uneconomically, but that 207 00:18:53.940 --> 00:18:58.420 is precisely what the government has in mind for the steel sector last year. 208 00:18:58.420 --> 00:19:02.980 Recession, inefficiency and bankruptcy are not the only man-made disasters which the 209 00:19:02.980 --> 00:19:06.960 government threatens us. Hardly a day goes by when the government doesn't issue some 210 00:19:06.960 --> 00:19:11.820 maniacal warning but impending terror attack, and the sense of uncertainty and confusion 211 00:19:11.820 --> 00:19:17.340 that follows can only forestall recovery. How much is real and how much is propaganda 212 00:19:17.340 --> 00:19:23.560 or merely bureaucratic risk aversion? We cannot know. They recently urged us to buy duct tape 213 00:19:23.560 --> 00:19:27.860 to seal the windows in our house in order to protect ourselves from chemical warfare. 214 00:19:27.860 --> 00:19:32.500 They also told us they may use nuclear bombs against enemies real and imagined. 215 00:19:32.500 --> 00:19:37.180 When the warning was given in February, gullible Americans cleaned out the stores of duct tape. 216 00:19:37.180 --> 00:19:40.540 Buried in the news a week later was the fact that the person who gave the tip that led 217 00:19:40.540 --> 00:19:42.220 to the orange alert was lying. 218 00:19:42.220 --> 00:19:46.420 Of course, the revelation didn't do the government much harm, and the crisis environment that 219 00:19:46.420 --> 00:19:50.100 the tip engendered is much good for our masters who want to keep us in a relentless state 220 00:19:50.100 --> 00:19:53.820 of insecurity and therefore dependent on them. 221 00:19:53.820 --> 00:19:56.580 That helps them keep doing what they want to do anyway. 222 00:19:56.580 --> 00:20:01.340 For example, spend money and inflate it with the debts thereby incurred. 223 00:20:01.340 --> 00:20:04.860 Politicians say they must run deficits of hundreds of billions of dollars to a verdant 224 00:20:04.860 --> 00:20:08.540 impending calamity that will make 9-11 look like a warm-up. 225 00:20:08.540 --> 00:20:12.460 They say this, but they've yet to issue a sell signal. 226 00:20:12.460 --> 00:20:16.660 The government continues to downplay the economic calamity before our eyes while talking of 227 00:20:16.660 --> 00:20:21.140 the prospects for a calamity that can only be solved, they say, by using the biggest 228 00:20:21.140 --> 00:20:25.580 big government program of them all, war. 229 00:20:25.580 --> 00:20:30.280 At the end of the Cold War, many of us hoped that normalcy would return, that the US would 230 00:20:30.280 --> 00:20:36.020 once again become a peaceful commercial republic. But Bush the Elder had a different idea. He 231 00:20:36.020 --> 00:20:42.220 decided to bomb Iraq and impose sanctions that would last 12 years, kill untold hundreds 232 00:20:42.220 --> 00:20:47.100 of thousands, inspire terror plots all over the Muslim world, provide a new rationale 233 00:20:47.100 --> 00:20:52.340 for why the US must continue to squander hundreds of billions a year on military public works 234 00:20:52.340 --> 00:20:54.100 Program. 235 00:20:54.100 --> 00:20:57.840 We were often told we must go to war because some swarthy foreign head of state is not 236 00:20:57.840 --> 00:20:59.740 a big fan of the US President. 237 00:20:59.740 --> 00:21:04.140 In 2003 the person fitting that description is Saddam Hussein. 238 00:21:04.140 --> 00:21:08.660 Before then it was Mullah Omar, a few years earlier it was Milosevic, before that it was 239 00:21:08.660 --> 00:21:12.740 some ward healer in Somalia, moving backward in time we had to take other strongmen in 240 00:21:12.740 --> 00:21:14.540 Panama and Haiti. 241 00:21:14.540 --> 00:21:16.300 The story goes on and on. 242 00:21:16.300 --> 00:21:20.660 It seems that the US government is addicted to conflict, it just can't seem to give it 243 00:21:20.660 --> 00:21:21.660 up. 244 00:21:21.660 --> 00:21:25.980 Now, I know there will be plenty of disagreement when I say we ought to be trading with Iraq, 245 00:21:25.980 --> 00:21:26.980 not bombing it. 246 00:21:26.980 --> 00:21:31.820 But let's at least be clear what we are talking about when we refer to the U.S. military machine. 247 00:21:31.820 --> 00:21:37.740 The U.S. will spend $400 billion on its military this year, and that does include VA hospitals, 248 00:21:37.740 --> 00:21:42.580 most spine, the atom bomb building in the energy department, the military part of NASA, 249 00:21:42.580 --> 00:21:45.980 or the Pentagon's huge black or secret budget. 250 00:21:45.980 --> 00:21:49.700 The second highest military budget in the world is Russia's. 251 00:21:49.700 --> 00:21:54.820 Going down the list, next come China, then Japan, then the UK. You have to tick through 252 00:21:54.820 --> 00:21:59.300 27 countries and add their total spending together to equal what the U.S. spends per 253 00:21:59.300 --> 00:22:05.180 year. Not since the Roman Empire has a single country been so militarily dominant. 254 00:22:05.180 --> 00:22:10.700 Let's look at the relative strength of the U.S. versus Iraq in particular. Quantitatively 255 00:22:10.700 --> 00:22:16.100 before the war, Iraq spent one quarter of 1% of what the U.S. spends on its military. 256 00:22:16.100 --> 00:22:21.500 Qualitatively, the Iraqi military machine was already crippled with no spare parts for 257 00:22:21.500 --> 00:22:26.900 its ancient equipment. The soldiers are teenage conscripts in rags with old rifles. The idea 258 00:22:26.900 --> 00:22:32.780 that this is a fair fight is a joke. Those who worry about Iraq overarming itself ought 259 00:22:32.780 --> 00:22:37.900 to look a bit closer to home. As for the shooting war, some military commentators have compared 260 00:22:37.900 --> 00:22:43.480 its ease to drowning puppies. Thanks to a combination of misrule and punishing sanctions, 261 00:22:43.480 --> 00:23:13.480 The long-time emphasis of the old liberal tradition with regard to war is this. Even the victor loses. We lose resources. We lose tax dollars. We lose trading relationships and goodwill around the world. Most of all, we lose freedom. And therein lies the fact that the United States faces a difficult foe, the desire of a people not to be invaded by a foreign army, and the unpredictability of political forces. 262 00:23:13.480 --> 00:23:18.000 The biggest cost of war to us, for there is no way the US can maintain a free market that 263 00:23:18.000 --> 00:23:23.080 is the foundation of prosperity while at the same time attempting to create a global military 264 00:23:23.080 --> 00:23:29.600 central plan. Big government abroad is incompatible with small government at home. To the extent 265 00:23:29.600 --> 00:23:36.600 we cheer war, we are cheering domestic socialism and our own eventual destruction as a civilization. 266 00:23:36.600 --> 00:23:41.120 Perhaps, however, you do not need persuading on any of these matters. I know many people 267 00:23:41.120 --> 00:24:11.120 I reject this posture. For one thing, I am firmly convinced that the government has reached too far. When you consider the full range of social, economic and international planning on which it has embarked, you can know in advance that this cannot work. Government is not God, nor are the men who run it impeccable or infallible, nor do they have a direct pipeline to the Almighty. The method they have chosen to bring about security and order is destined towards failure. 268 00:24:11.120 --> 00:24:16.720 The war against terrorism is a good example. Everyone in Washington is terrified of the 269 00:24:16.720 --> 00:24:21.240 next attack. To shore up the war there has been no shortage of rhetoric, no expenses 270 00:24:21.240 --> 00:24:25.960 spared on arms escalation, there is no lack of will. The effort has the aid of plenty 271 00:24:25.960 --> 00:24:31.400 of smart people. It is backed by threats of massive bloodshed. What is missing is the 272 00:24:31.400 --> 00:24:35.960 essential means to cause the war to yield beneficial results. With all the millions 273 00:24:35.960 --> 00:24:41.020 of potential terrorists out there and the infinite possibilities of how, when and where 274 00:24:41.020 --> 00:24:45.580 Where they will strike, there is no way the state can possibly stop them. 275 00:24:45.580 --> 00:24:48.580 Behind terrorism is political grievance. 276 00:24:48.580 --> 00:24:49.580 This is not speculation. 277 00:24:49.580 --> 00:24:54.460 That is the word of the terrorists themselves from Timothy McVeigh to Osama bin Laden to 278 00:24:54.460 --> 00:24:56.620 the suicide bombers. 279 00:24:56.620 --> 00:25:01.900 The pool of actual terrorists, like the pool of the poor in the war on poverty, is limited 280 00:25:01.900 --> 00:25:05.540 and can be known and they are the ones the state focuses on. 281 00:25:05.540 --> 00:25:10.700 But the pool of potential terrorists and potential poor people is unlimited and unleashed by 282 00:25:10.700 --> 00:25:14.780 by the very means the state employs. Hence, not only does the state not accomplish its 283 00:25:14.780 --> 00:25:19.220 stated goals, it recruits more people into the armies of the enemy, and ends up completely 284 00:25:19.220 --> 00:25:23.820 swamped by a problem that grows ever worse, as the target population is able to make a 285 00:25:23.820 --> 00:25:29.420 mockery of the state through sheer defiance. In the war on poverty, as more and more were 286 00:25:29.420 --> 00:25:33.980 added to the ranks of the poor, and the intended beneficiaries of the programs themselves began 287 00:25:33.980 --> 00:25:38.220 to mock the state's benevolence, people began to speak of the failure and collapse of the 288 00:25:38.220 --> 00:25:44.380 of Great Society. Of course the welfare state still exists, but the moral passion and ideological 289 00:25:44.380 --> 00:25:49.060 fervor are gone, in the same way we will soon be speaking of the collapse of the war on 290 00:25:49.060 --> 00:25:54.620 terror. Bin Laden is still on the loose and everyone knows there are hundreds or thousands 291 00:25:54.620 --> 00:25:59.500 of replacement Bin Ladens out there. Terrorism has increased since the war began, Israel 292 00:25:59.500 --> 00:26:03.840 suffers daily and in constantly changing ways in which even the most famous and empowered 293 00:26:03.840 --> 00:26:09.160 and intelligence and military units cannot anticipate or prevent. 294 00:26:09.160 --> 00:26:13.640 But can't the state just kill more, employ ever more violence, perhaps even terrorize 295 00:26:13.640 --> 00:26:19.800 the enemy into passivity? This cannot work. Even prisons experience rioting. A bracing 296 00:26:19.800 --> 00:26:24.920 comment from Israeli military historian Martin Van Creveld, quote, the Americans in Vietnam 297 00:26:24.920 --> 00:26:30.120 tried it. They killed between two and a half and three million Vietnamese. I don't see 298 00:26:30.120 --> 00:26:37.440 Without admitting defeat, the Americans finally pulled out of Vietnam, which today is a thriving 299 00:26:37.440 --> 00:26:43.040 stock market. Can the U.S. just back out of its war on terror? Wouldn't that mean surrender? 300 00:26:43.040 --> 00:26:48.480 It would mean that the state surrenders its role, but not that everyone else does. Had 301 00:26:48.480 --> 00:26:52.680 the airlines been in charge of their own security, 9-11 would not have happened. In the same 302 00:26:52.680 --> 00:26:56.780 way that the free market provides for all our material needs, it can provide our security 303 00:26:56.780 --> 00:27:03.100 needs as well. The war on terror is impossible, not in the sense that it cannot cause immense 304 00:27:03.100 --> 00:27:07.100 amounts of bloodshed and destruction and loss of liberty, but in the sense that it cannot 305 00:27:07.100 --> 00:27:11.300 finally achieve what it is supposed to achieve and will only end in creating more of the 306 00:27:11.300 --> 00:27:16.380 same conditions that led to its declaration in the first place. In other words, it's 307 00:27:16.380 --> 00:27:22.020 a typical government program, costly and unworkable, like socialism, like the war on poverty, like 308 00:27:22.020 --> 00:27:26.420 the war on drugs, like every other attempt by the government to shape reality according 309 00:27:26.420 --> 00:27:32.620 The next time Bush gets up to make his promises of the amazing things he will achieve through 310 00:27:32.620 --> 00:27:37.140 force of arms, how the world will be bent and shaped by his administration, think of 311 00:27:37.140 --> 00:27:42.060 Stalin speaking at the 15th Party Congress, promising, quote, further to promote the development 312 00:27:42.060 --> 00:27:46.620 of our country's national economy and all branches of production, unquote. Everyone 313 00:27:46.620 --> 00:27:51.820 applauded and waited in blood, pursuant to that goal, but in the end, even if he did 314 00:27:51.820 --> 00:27:57.480 did not know it, it was impossible to achieve. Mises was so brilliant when it came to issues 315 00:27:57.480 --> 00:28:03.120 of money and credit, also saw the need for a thriving economy to operate amid an environment 316 00:28:03.120 --> 00:28:10.140 of peace. War, he said, is harmful not only to the conquered but to the conqueror. Society 317 00:28:10.140 --> 00:28:15.260 has arisen out of the works of peace. The essence of society is peacemaking. Peace and 318 00:28:15.260 --> 00:28:20.340 not war is the father of all things. Only economic action has created this wealth around 319 00:28:20.340 --> 00:28:31.500 Our age is dominated by the state and its errors. The state is given us recession and 320 00:28:31.500 --> 00:28:36.940 war, while liberty is given us prosperity and peace. Which of the two paths prevails 321 00:28:36.940 --> 00:28:42.380 in the end depends on the ideas we hold about freedom, capitalism and ourselves. May we 322 00:28:42.380 --> 00:28:47.020 never forget the great truth that our founding fathers worked so hard to impart. Tyranny 323 00:28:47.020 --> 00:28:52.700 destroys while liberty is the mother of all that is beautiful and true in our world. 324 00:28:52.700 --> 00:28:56.740 I make no apologies for being a champion of prosperity and its source, the free market 325 00:28:56.740 --> 00:29:03.140 economy. It is what gives birth to civilization itself. It is fashionable to reject concerns 326 00:29:03.140 --> 00:29:08.700 about the economy as narrow and uninteresting, a merely bourgeois interest. This attitude 327 00:29:08.700 --> 00:29:13.660 comes to prevail we have great reason to be concerned about our present age. If on the 328 00:29:13.660 --> 00:29:17.820 On the other hand, we can educate ourselves about the workings of economic forces, and 329 00:29:17.820 --> 00:29:21.780 the way in which they are the foundations of freedom and peace, we will not only emerge 330 00:29:21.780 --> 00:29:25.940 from this recession prepared to enter into a new growth path, we will have gone a long 331 00:29:25.940 --> 00:29:30.060 way to protecting ourselves from future assaults on our right to be free.