WEBVTT NOTE The Macroeconomics of the Fed: Mainstream and Austrian 1 00:00:00.000 --> 00:00:02.000 What are you all doing sitting here? 2 00:00:02.000 --> 00:00:05.000 Why aren't you out spending money stimulating the economy? 3 00:00:08.000 --> 00:00:14.000 I'm going to tell you about a plan that will help you go out and spend money, 4 00:00:14.000 --> 00:00:16.000 or actually force you to go out and spend money. 5 00:00:16.000 --> 00:00:22.000 A plan that many modern macroeconomists are now, or some at least, are now pushing. 6 00:00:23.000 --> 00:00:28.000 So let me sort of give you an introduction to what macroeconomics has been all about. 7 00:00:28.000 --> 00:00:35.860 about, really a morbid fear of hoarding has haunted macroeconomics since its beginning 8 00:00:35.860 --> 00:00:42.640 in the writing of John Law in 1705. Most macroeconomists have proposed to solve the problem of people 9 00:00:42.640 --> 00:00:48.360 not spending enough by flooding the economy with cheap money created by a central bank. 10 00:00:48.360 --> 00:00:54.320 But what if people will not lend or spend this money? As seems to be the case in the 11 00:00:54.320 --> 00:01:05.920 One proposed solution is to tax hoarding by deliberately stimulating fears of runaway inflation 12 00:01:05.920 --> 00:01:11.360 among the public by having the central bank announce a very high inflation target, say 13 00:01:11.360 --> 00:01:15.100 of 6 to 10 percent per year. 14 00:01:15.100 --> 00:01:20.580 Another solution is to levy a carry tax on currency and bank deposits so that money becomes 15 00:01:20.580 --> 00:01:26.580 is like rotting potatoes, and people rush to spend and lend it, even at negative interest rates. 16 00:01:26.580 --> 00:01:28.580 This is being proposed. 17 00:01:28.580 --> 00:01:33.580 Now, this proposal has been presented in fancy scientific-sounding terms, 18 00:01:33.580 --> 00:01:41.580 but like all other macroeconomic terms or policies, this policy had already been advocated by an earlier monetary crank. 19 00:01:41.580 --> 00:01:46.580 Well, that's the name that we gave to macroeconomists in the 19th century, before Keynes wrote. 20 00:01:46.580 --> 00:01:50.580 And it's still the correct name I would claim. 21 00:01:50.580 --> 00:01:55.580 Silvio Gissell was the name of the writer who first proposed a tax on hoarding. 22 00:01:55.580 --> 00:01:57.580 He called it stamp money. 23 00:01:57.580 --> 00:02:02.580 It is worth briefly examining his original plan to get an idea of the quality of his thought. 24 00:02:02.580 --> 00:02:09.580 I will also briefly review the reactions of some famous macroeconomists to Gissell and his scheme 25 00:02:09.580 --> 00:02:13.580 before talking a little bit more about the modernized version of his plan. 26 00:02:16.580 --> 00:02:31.580 Now, Gissell was born in Germany in 1862. He emigrated to Argentina in 1887 where he became a successful merchant and began writing on monetary reform in 1871. 27 00:02:31.580 --> 00:02:41.580 That's always a bad sign. A successful merchant writing about monetary reform. He got caught in a depression, wondered why his success disappeared, claimed it was not his fault. 28 00:02:41.580 --> 00:02:56.580 So he looked at the economy as a whole. He soon returned to Europe, where he took up residence in Germany and Switzerland and continued to write and form, living on a vegetarian community for a while, and founding and publishing two magazines. 29 00:02:56.580 --> 00:03:07.580 He was married, had three children by his wife while carrying on relationships with three other women whom he convinced at one point all to live together with him. 30 00:03:07.580 --> 00:03:11.580 The reports say that the arrangement did not last. 31 00:03:11.580 --> 00:03:18.580 In 1919, he served as People's Representative for Finances of the Bavarian Soviet Republic. 32 00:03:18.580 --> 00:03:20.580 You've probably never heard of that. 33 00:03:20.580 --> 00:03:31.580 He immediately drafted a law to implement his monetary scheme, but his term of office lasted only seven days as the Bavarian Soviet Republic came to a swift and bloody end. 34 00:03:31.580 --> 00:03:37.580 Gissell was arrested and detained for several months before he was acquitted of treason by a Munich court-martial. 35 00:03:37.580 --> 00:03:45.580 Nevertheless, because of his participation in the Soviet Republic, the Swiss government barred him from ever returning to his farm in Switzerland. 36 00:03:45.580 --> 00:04:15.580 Juscel's monetary scheme was based on his belief that economic depression was a result of an asymmetry, a difference, between the supply of goods and the demand for goods. Goods, by their nature, are perishable. They deteriorate in quality and quantity over time. Their supply to the market, therefore, cannot be postponed at all or for very long, according to Juscel. Once they are produced, the owner is compelled to offer them for sale. The supply of goods is determined by technical factors and is not 37 00:04:15.580 --> 00:04:17.580 are subject to human will. 38 00:04:17.580 --> 00:04:20.580 Juscel expressed all this in very colorful language. 39 00:04:20.580 --> 00:04:33.580 Rust, damp, decay, heat, cold, breakage, mice, moth, flies, spiders, dust, wind, lightning, hail and earthquakes, epidemics, accidents, floods and thieves 40 00:04:33.580 --> 00:04:37.580 wage war continuously upon the quantity and quality of goods. 41 00:04:37.580 --> 00:04:43.580 Few goods fail to exhibit the results of this warfare a few days or a few months after their production. 42 00:04:43.580 --> 00:04:49.780 It is precisely the most essential goods, food and clothing, that are least able to withstand this warfare. 43 00:04:49.780 --> 00:04:51.500 I'm still quoting DeSalle here. 44 00:04:51.500 --> 00:04:56.620 The only way an owner of goods can protect himself against such losses is to sell them. 45 00:04:56.620 --> 00:04:59.580 He is compelled by the nature of his property 46 00:04:59.580 --> 00:05:01.900 to put it up for sale. 47 00:05:01.900 --> 00:05:04.820 If he resists this compulsion, 48 00:05:04.820 --> 00:05:09.900 if he resists this compulsion, he is punished, and the punishment is carried out by his property, 49 00:05:09.900 --> 00:05:30.900 We may therefore regard supply of goods, that is the demand for money, as identical with the goods themselves. Supply is independent of deals on the market. Supply is a thing, a material, not a business transaction. Supply always equals the stock of goods in existence. 50 00:05:30.900 --> 00:05:39.900 Okay, that was a quote from Gissell. According to Gissell, things are much different on the demand side, where people use money to demand goods. 51 00:05:39.900 --> 00:05:57.900 The demand for goods is composed of money, gold money to be precise. Because gold does not deteriorate with the passage of time, demand can always be postponed without loss, if the buyer believes that the conditions for exchange are unfavorable and will improve in the future. 52 00:05:57.900 --> 00:06:02.900 In the future, demand, in contrast to supply, is therefore very much subject to human will. 53 00:06:02.900 --> 00:06:06.900 Again, Juscel gives us an entertaining account of his views. 54 00:06:06.900 --> 00:06:11.900 Gold may be regarded as a foreign matter, intruded upon the earth, 55 00:06:11.900 --> 00:06:15.900 and successfully withstanding all the destructive forces of nature. 56 00:06:15.900 --> 00:06:19.900 Gold neither rusts nor decays, neither breaks nor dies. 57 00:06:19.900 --> 00:06:23.900 Neither frost, heat, sun, rain, nor fire can harm it. 58 00:06:23.900 --> 00:06:31.900 The holder of money made of gold need fear no loss arising from the material of his possession, nor does the quality change. 59 00:06:33.900 --> 00:06:40.900 Still quoting, the possessor of money can therefore postpone his demand for goods, he can use his will. 60 00:06:40.900 --> 00:06:49.900 He must indeed sooner or later offer his gold for sale, for in itself it is useless to him, but he is free to choose the time at which he does so. 61 00:06:53.900 --> 00:07:03.900 So Gissell's idea of commercial crises, he found in the disparity between supply and demand. 62 00:07:03.900 --> 00:07:10.900 The fact that demand using money can be withheld from the market where supply must always be brought to the market. 63 00:07:10.900 --> 00:07:13.900 And when demand is withheld, prices begin to fall. 64 00:07:13.900 --> 00:07:21.900 Merchants, seeing prices falling, do not want to buy goods because they're fearful that their profit margins will disappear, according to Gissell. 65 00:07:21.900 --> 00:07:37.900 And as a result, the sellers of goods become even more desperate to sell them, cut their prices further, and a vicious cycle occurs in which demand continues to withdraw, people hold more and more money as prices fall, and other people are desperate to get rid of goods. 66 00:07:37.900 --> 00:07:41.900 So we go into a crisis. 67 00:07:41.900 --> 00:07:47.900 Now, Gissell proposes to deal with the scourge of commercial depressions by attacking it at its roots. 68 00:07:47.900 --> 00:07:52.900 That is, by destroying the superior power of demand over supply. 69 00:07:52.900 --> 00:07:59.900 This involves destroying money's attribute of permanence and subjecting money to a process of deterioration of value 70 00:07:59.900 --> 00:08:03.900 that will encourage its possessor to spend it as quickly as possible. 71 00:08:03.900 --> 00:08:15.900 Jassell introduced his monetary reform proposal with the following remarks, quote, 72 00:08:15.900 --> 00:08:29.900 Let us then make an end of the privilege of money. Nobody, not even savers, speculators, or capitalists, must find money as a commodity, preferable to the contents of the markets, the shops, and warehouses. 73 00:08:29.900 --> 00:08:35.900 If money is not to hold sway over good, it must deteriorate, as they do. 74 00:08:35.900 --> 00:08:39.900 Let it be attacked by moth and rust. Let it sicken. Let it run away. 75 00:08:39.900 --> 00:08:45.900 And when it comes to die, let its possessor pay to have its carcass flayed and buried. 76 00:08:45.900 --> 00:08:53.900 Then, and not till then, shall we be able to say that money and goods are on an equal footing and perfect equivalence. 77 00:08:53.900 --> 00:08:58.900 We must subject money to the loss to which goods are liable through the necessity of storage. 78 00:08:58.900 --> 00:09:04.900 Juscel vividly described the properties of his ideal medium of exchange in the following terms. 79 00:09:04.900 --> 00:09:17.900 He said, our goods rot, decay, rust, break, so only if money has equally disagreeable loss involving properties can it exchange rapidly, securely and cheaply. 80 00:09:17.900 --> 00:09:21.900 For such money can never on any account be preferred by anyone to goods. 81 00:09:21.900 --> 00:09:37.900 Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for exchange of potatoes, newspapers, iron and ether. 82 00:09:37.900 --> 00:09:50.900 For such money is not preferred to goods by the purchaser or the seller. We then part with our goods for money because we need money as a medium of exchange, not because we expect an advantage from the possession of the money. 83 00:09:50.900 --> 00:09:56.900 So we must make money worse as a commodity if we wish to make it better as a medium of exchange. 84 00:09:56.900 --> 00:10:02.900 Okay, so what plan did he have in mind to turn money into rotting potatoes? 85 00:10:02.900 --> 00:10:10.900 To endow money with the property of rotting potatoes, Gisele proposed what he called the free money plan. 86 00:10:10.900 --> 00:10:17.900 Without going into too much detail, under this plan, a paper fiat currency, let us say dollars, would be issued. 87 00:10:17.900 --> 00:10:31.900 The reverse side of each bill would have rows of spaces for stamps equaling a total of 52 spaces, and I have a picture of this, if anyone wants to see it later on, I can't really put it up, Giselle actually put it in his book. 88 00:10:31.900 --> 00:10:41.900 So the reverse side of each bill would have 52 weeks, places to put stamps weekly on the bill. 89 00:10:41.900 --> 00:10:52.900 The first space would bear a date in the first week of the calendar year, and each subsequent space would bear a date one week later than the date in the previous space. 90 00:10:52.900 --> 00:10:57.900 Before the bill could be spent as legal tender, its stamps would have to be current. 91 00:10:57.900 --> 00:11:04.900 That is, if Wednesday's dates appeared in the stamp spaces, then a ten-cent stamp would have to be purchased from the bank or issuing agency, 92 00:11:04.900 --> 00:11:12.900 and a fix to the bill for it to be accepted as legal tender from a given Wednesday to the following Tuesday midnight. 93 00:11:12.900 --> 00:11:23.900 At the end of the year, the bill would be returned to the bank or government issuing office bearing all 52 stamps and replaced with another unstamped bill of equal denomination. 94 00:11:23.900 --> 00:11:38.900 So, during the course of the bill's circulation over the year, $5.20 worth of stamps, equals 52 weeks times $0.10 per week, would have been purchased, or 5.2% of the value of the $100 bill. 95 00:11:38.900 --> 00:11:54.900 This means that if an individual did not spend the bill in a week in which he received it, he would lose one tenth of one percent of the value of the bill in the form of the ten cents he would have to pay for the stamp to make the bill legal tender current the following week. 96 00:11:54.900 --> 00:12:02.900 And it would cost him ten cents every week thereafter that he maintained the bill in his possession and did not spend it, lend it or invest it. 97 00:12:02.900 --> 00:12:08.900 This would be, in effect, a 5.2% annual tax on hoarding. 98 00:12:08.900 --> 00:12:15.900 Another way of looking at it is that currency would earn an interest rate of negative 5.2%. 99 00:12:15.900 --> 00:12:20.900 This is what Macri Comps would love to do. They'd love to push interest rates down below zero. 100 00:12:20.900 --> 00:12:29.900 So people would have to be forced by the fact that money is deteriorating at that rate to loan at interest rates of 2 or 3%. 101 00:12:29.900 --> 00:12:38.900 If you're losing 5.2% of the value of your money every year, you'll loan at negative 3% or negative 2% if you don't want to spend it on consumption. 102 00:12:38.900 --> 00:12:49.900 Now you and I, this would create an incentive if one did not wish to spend the currency on current consumption to lend money even at very low or negative interest rates. 103 00:12:49.900 --> 00:12:53.900 In this way, Gissell argued, the hoarding problem would be solved. 104 00:12:53.900 --> 00:12:58.900 Interest would be abolished and commercial depressions would be banished forever. 105 00:12:58.900 --> 00:13:04.980 Now, you and I recognize Ducell as just a garden variety quack, peddling yet another 106 00:13:04.980 --> 00:13:09.940 quack cure for what ails the economy, but you might be surprised to learn that two of 107 00:13:09.940 --> 00:13:14.260 the most prominent macroeconomists of the 20th century, Irving Fisher and John Maynard 108 00:13:14.260 --> 00:13:19.300 Keynes, thought very highly of Ducell and his monetary scheme. It is even more surprising 109 00:13:19.300 --> 00:13:23.980 to learn that contemporary macroeconomists have advanced modernized versions of this 110 00:13:23.980 --> 00:13:32.980 and his plan to extricate us from our current recession. 111 00:13:32.980 --> 00:13:38.780 Milton Friedman called Irving Fisher the greatest American economist that ever or whoever lived. 112 00:13:38.780 --> 00:13:42.680 Whatever the merits of that judgment, it is true that Fisher and not Keynes was really 113 00:13:42.680 --> 00:13:45.660 the first modern macroeconomist. 114 00:13:45.660 --> 00:13:50.740 That is, he was the first one to consistently explain or attempt to explain the phenomena 115 00:13:50.740 --> 00:13:56.740 of Inflation, Recession and Unemployment in terms of carefully constructed aggregates 116 00:13:56.740 --> 00:14:03.340 and averages that is abstracting from human actions. During the Great Depression, by the 117 00:14:03.340 --> 00:14:10.340 way Irving Fisher predicted that the era of depressions was over, that in the late 1920s 118 00:14:10.340 --> 00:14:15.800 he said we have now found out how to stabilize the price level and we have now an era of 119 00:14:15.800 --> 00:14:25.800 for Perpetual Prosperity. He lost his very rich wife's entire fortune on that bed by following his belief. 120 00:14:25.800 --> 00:14:29.800 During the Great Depression, Irving Fisher endorsed Giselle's plan in the following words, 121 00:14:29.800 --> 00:14:34.800 and he was desperate to get out of the Depression, both for his own personal fortune 122 00:14:34.800 --> 00:14:39.800 and because his reputation had been so blackened by his misforecast. 123 00:14:39.800 --> 00:14:48.300 So he wrote, if only buying could be started first, business borrowing would follow, for the purpose of directly stimulating the buyers. 124 00:14:48.300 --> 00:14:53.300 A unique stamp dollar plan has been devised, a sort of stamp tax on hoarding. 125 00:14:53.300 --> 00:14:59.800 The plan offers the most efficient method of controlling hoarding and probably the speediest way out of a depression. 126 00:14:59.800 --> 00:15:02.300 That was in 1934, he wrote that. 127 00:15:02.300 --> 00:15:08.800 Desperate for a way out of the depression, which in the 1920s he claimed would never again occur, 128 00:15:08.800 --> 00:15:13.760 Fischer looked back in history and thought he saw a way out in the method used by medieval 129 00:15:13.760 --> 00:15:19.600 evil kings who regularly debased their citizens coinage. To Fischer, it seemed like a successful 130 00:15:19.600 --> 00:15:26.880 historical application of Giselle's plan. So he said that between 1150 and 1350, re-coinage 131 00:15:26.880 --> 00:15:33.300 was periodical. A ruler would call in all outstanding coins twice or three times a year 132 00:15:33.300 --> 00:15:39.420 and exchange them for new ones after deducting twenty-five percent. 133 00:15:39.420 --> 00:15:40.940 So depreciating the money 134 00:15:40.940 --> 00:15:43.020 by seventy-five percent 135 00:15:43.020 --> 00:15:46.180 over the course of the year. He thought this was a great thing, it would make people spend 136 00:15:46.180 --> 00:15:49.100 money faster. 137 00:15:49.100 --> 00:15:53.020 And he goes on to claim that this really gave us a boost to trade and 138 00:15:53.020 --> 00:15:55.220 handicrafts and so on. 139 00:15:55.220 --> 00:15:59.300 And he said, he called this debasement by the kings, the stealing of gold from 140 00:15:59.300 --> 00:16:04.820 from their subjects, the first example of something akin to velocity control, and it 141 00:16:04.820 --> 00:16:09.340 is of particular interest in the history of stabilization. This principle was forgotten 142 00:16:09.340 --> 00:16:14.860 until it appeared definitely in the writing of Silvio Gissell." Fisher actually wrote 143 00:16:14.860 --> 00:16:19.980 a small book in 1933, which I had never heard about before, entitled Stamp Script, in which 144 00:16:19.980 --> 00:16:24.820 he called attention to experiments with the issue of local stamp currency in Germany, 145 00:16:24.820 --> 00:16:31.540 Austria and the U.S. In this book he adapted Giselle's plan for use by municipalities, 146 00:16:31.540 --> 00:16:36.500 community organizations, private companies, etc. In a letter to a Canadian newspaper, 147 00:16:36.500 --> 00:16:42.580 Fisher proclaimed, quote, applied correctly, stamped script, could in fact haul us out 148 00:16:42.580 --> 00:16:50.540 of the crisis in a few weeks. I am a humble servant of the merchant Giselle, unquote. 149 00:16:50.540 --> 00:16:54.540 Keynes devoted five pages of the General Fury to Giselle and his work. 150 00:16:54.540 --> 00:17:11.540 He referred to Giselle as a strange, that's certainly true, unduly neglected prophet, whose work contains flashes of deep insight and who not only just failed to reach down to the essence of the matter, and who only just failed to reach down to the essence of the matter. 151 00:17:11.540 --> 00:17:17.540 Keynes reported that earlier in his career he was bombarded with copies of Giselle's works by his devotees. 152 00:17:17.540 --> 00:17:22.700 Keynes admitted, however, that initially he entirely failed to discover their merit, unquote, 153 00:17:22.700 --> 00:17:27.180 and treated Gisele's, quote, profoundly original strivings as being no better than those of 154 00:17:27.180 --> 00:17:28.180 a crank. 155 00:17:28.180 --> 00:17:31.540 Okay, well, his initial judgment was, of course, correct. 156 00:17:31.540 --> 00:17:36.960 In evaluating Gisele's free money plan, Keynes wrote, Gisele had carried his theory far enough 157 00:17:36.960 --> 00:17:41.860 to lead him to a practical recommendation, which may carry with it the essence of what 158 00:17:41.860 --> 00:17:42.860 is needed. 159 00:17:42.860 --> 00:17:57.860 Thus, the prime necessity is to reduce the money rate of interest, and this, he pointed out, meaning Giselle pointed out, can be affected by causing money to incur carrying costs, just like other stocks of barren goods. 160 00:17:57.860 --> 00:18:05.860 I have a few quotations here from other very prominent economists. I'll just give you a sample. 161 00:18:05.860 --> 00:18:21.860 One economist, Dudley Dillard, who wrote an influential book on Keynesian economics in the 1950s, wrote that Gisele's analysis is not completely developed in several important points, but all in all his model shows no fault. 162 00:18:21.860 --> 00:18:30.860 Now let me just turn to two Nobel Prize winners. Maurice Allais, French economist and Nobel Prize winner in economics, wrote, 163 00:18:30.860 --> 00:18:46.860 We would especially like to certify our great esteem for pioneers such as Proudhon, Balras, and Silvio Gissell, who accomplished the great reconciliation of individualism and collectivism that the economic order we are striving for must rest upon." 164 00:18:46.860 --> 00:18:48.860 That's a Nobel Prize winner speaking. 165 00:18:48.860 --> 00:19:00.860 Another Nobel Prize winner, Lawrence Klein, who built the first large-scale econometric model of the U.S. economy wrote in a very influential book called the Keynesian Revolution, 166 00:19:00.860 --> 00:19:08.860 quote, academic economists are ready to ignore the crackpots, well I guess so, especially monetary reformers. 167 00:19:08.860 --> 00:19:19.860 Johansson, Forster and Ketchings, Hobson and Gissell all had brilliant contributions to make in our day, but could receive no audience. 168 00:19:19.860 --> 00:19:25.860 It is hoped that in the future economists will give a sympathetic ear to those who possess great economic intuition. 169 00:19:25.860 --> 00:19:33.860 When you're an unclear writer and you don't make logical arguments, you have great economic intuition, as Keynes did. 170 00:19:33.860 --> 00:19:41.860 Okay, let me just finish up with a version of the modernized plan. 171 00:19:41.860 --> 00:19:51.860 Now, several eminent macroeconomists have explicitly advocated the deliberate creation of inflationary expectations among the public as a legitimate tool of monetary policy. 172 00:19:51.860 --> 00:20:01.860 And that includes Paul Krugman and a number of others, including Bernanke in his earlier writings before he was the chairman of the Fed. 173 00:20:01.860 --> 00:20:17.860 But, Greg Mankiw, the former chairman of the Council of Economic Advisers under George W. Bush, and the author of a top-selling textbook on economic principles, once famously dismissed Kane's general theory as an outdated book. 174 00:20:17.860 --> 00:20:20.860 And his textbook is pretty good, actually. 175 00:20:20.860 --> 00:20:26.860 He now argues that the Fed needs to convince people that we are going back to the normal inflation rate of 2-3%. 176 00:20:26.860 --> 00:20:33.460 In order to ignite the necessary inflationary expectations and stimulate spending, he suggested 177 00:20:33.460 --> 00:20:40.100 the following wording for a recent Fed press release. 178 00:20:40.100 --> 00:20:45.580 And he wrote the following, the Federal Open Market Committee recognizes that modern inflation 179 00:20:45.580 --> 00:20:48.420 would be desirable under the present circumstances. 180 00:20:48.420 --> 00:20:53.780 In particular, the overall level of prices a decade, hence, should be about 30% higher 181 00:20:53.780 --> 00:20:55.840 than the price level today. 182 00:20:55.840 --> 00:21:00.640 The Committee anticipates keeping the stance of monetary policy sufficiently accommodative, 183 00:21:00.640 --> 00:21:05.640 i.e. inflationary, to achieve that degree of inflation over the coming decade." 184 00:21:05.640 --> 00:21:10.180 Now that's what he would like to have seen the Fed write, worth rightly pointing out 185 00:21:10.180 --> 00:21:12.600 that they're going to create inflation. 186 00:21:12.600 --> 00:21:19.320 But given that the Fed cannot do that, he came up with another plan. 187 00:21:19.320 --> 00:21:26.680 So in this particular plan he was deliberately, or recommending that the Fed deliberately 188 00:21:26.680 --> 00:21:30.680 inflate away about 25% of the dollar's value over the course of the next decade. 189 00:21:30.680 --> 00:21:36.440 And as I said, that really wouldn't fly. 190 00:21:36.440 --> 00:21:42.840 So he endorsed also a proposal for driving the nominal interest rate below zero, that 191 00:21:42.840 --> 00:21:49.760 as a Modern Equivalent of the Scheme for a Carrying Tax on Money proposed by Silvio Giselle. 192 00:21:49.760 --> 00:21:55.560 In the intellectual exercise formulated by Mankiw, the Fed would announce that a year 193 00:21:55.560 --> 00:22:00.840 from, let's say, today's date, it intended to pick a numeral from zero to nine out of 194 00:22:00.840 --> 00:22:01.840 a hat. 195 00:22:01.840 --> 00:22:06.080 Okay, so there would be ten numerals in a hat from zero to nine. 196 00:22:06.080 --> 00:22:07.800 They'd pick a numeral out of the hat. 197 00:22:07.800 --> 00:22:12.480 A currency, all currency with a serial number ending in the numeral would instantly lose 198 00:22:12.480 --> 00:22:20.480 The Federal Reserve uses its status as legal tender. So if 8 was picked out, everyone would check their bills, and that bill would no longer be legal tender. 199 00:22:20.480 --> 00:22:26.480 That's 10% of the currency would be anesthetized, neutralized. 200 00:22:26.480 --> 00:22:39.480 This would cause the expected return on holding currency during the course of the year to be negative 10%. 201 00:22:39.480 --> 00:22:46.480 This is a 10% chance that the dollar bill you're holding is going to be worthless with a $100 bill or a $20 bill a year from now. 202 00:22:46.480 --> 00:22:53.480 What would the incentive be? To rush out and spend your currency and get our recovery restarted. 203 00:22:53.480 --> 00:23:06.480 This would allow the Fed to reduce interest rates below zero for a year because people would happily loan money for, say, negative 2% when faced with the prospect of losing 10%. 204 00:23:06.480 --> 00:23:14.480 At negative interest rates, many people would now have a strong incentive to spend the money immediately on consumer goods, which was the Fed's aim. 205 00:23:14.480 --> 00:23:20.480 Now, to be sure to Mankiw, this scheme was dreamed up by one of his graduate students. 206 00:23:20.480 --> 00:23:28.480 Although Mankiw maintains that the plan does address, and I'm quoting Mankiw, does address a fundamental problem facing the economy right now. 207 00:23:28.480 --> 00:23:33.480 Given the fall in wealth, increases in risk premiums and problems in the banking system, 208 00:23:33.480 --> 00:23:48.480 The interest rate consistent with full employment may well be negative, and there's a Fed study saying that in fact a few years ago that the interest rate should be negative 5% in order to get the recovery started. 209 00:23:50.480 --> 00:23:59.480 So we've come full circle, okay? Macroeconomics has gone back to its roots, to these crazy schemes to make us sort of rotting potato type money. 210 00:23:59.480 --> 00:24:01.480 And I'll stop there, thank you. 211 00:24:03.480 --> 00:24:05.480 Thank you very much.