WEBVTT NOTE Inflation in Recent Monetary History 1 00:00:00.000 --> 00:00:10.000 Let me sort of buy a quote from Henry Hazlitt that I think describes very well what inflation is and what it does. 2 00:00:10.000 --> 00:00:11.000 I'm quoting him. 3 00:00:11.000 --> 00:00:14.000 This is what monetary management really amounts to. 4 00:00:14.000 --> 00:00:20.000 In practice, it is merely a high sounding euphemism for continuous currency debasement. 5 00:00:20.000 --> 00:00:25.000 It consists of constant lying in order to support constant swindling. 6 00:00:25.000 --> 00:00:33.000 Instead of automatic currencies based on gold, people are forced to take managed currencies based on guile. 7 00:00:33.000 --> 00:00:39.000 Instead of precious metal, they hold paper promises whose value falls with every bureaucratic whim. 8 00:00:39.000 --> 00:00:48.000 And they are suavely assured that only hopelessly antiquated minds dream of returning to truth and honesty and solvency and gold. 9 00:00:48.000 --> 00:00:58.000 I would also add to Hazlitt, to what Hazlitt says is that really the choice is also between gold and dictatorship, as we've seen very recently, 10 00:00:58.000 --> 00:01:10.000 with secret meetings among central bank officials and officials of the administration to call a meeting at which they present a fait accompli to the bankers 11 00:01:10.000 --> 00:01:24.000 regarding taking ownership in their banks, in which they seat these bankers in alphabetical order, denigrating these bankers, treating them like school children, 12 00:01:24.000 --> 00:01:34.000 in which they had secretly agreed beforehand to call an end to the meeting as soon as any bankers objected to allow them to stew and worry for a day or two before they called another meeting, 13 00:01:34.000 --> 00:01:44.000 in which only one banker, CEO of Wells Fargo, God bless him, raised any sort of objection to this sort of treatment 14 00:01:44.000 --> 00:01:50.000 and asked why, in fact, does the government have to take a stake in the banks? 15 00:01:50.000 --> 00:01:59.000 After which he was taken aside and told that, well, he could sign voluntarily, but he had to keep in mind, or not sign, 16 00:01:59.000 --> 00:02:04.000 But you have to keep in mind that, in fact, all banks were regulated by the government. 17 00:02:04.000 --> 00:02:07.500 And if there should be problems with his bank, it would be carefully looked at. 18 00:02:07.500 --> 00:02:17.100 And whether or not he would get a cash infusion would be up to him and what he finally decided. 19 00:02:17.100 --> 00:02:21.500 So we're faced with that. We're faced with the White House. 20 00:02:21.500 --> 00:02:33.500 A few days later, after giving out this cash and telling banks, the White House then telling banks that now they had to lend it, 21 00:02:33.500 --> 00:02:42.500 even though there were no strings attached, they didn't attach any explicit strings because they were very, very fearful that the banks would not sign on to the whole deal. 22 00:02:42.500 --> 00:02:50.500 But once they did and began buying weaker competitors and also giving out bonuses with the money, 23 00:02:50.500 --> 00:02:55.500 We now had commands from the White House that they must lend, they must not hoard. 24 00:02:55.500 --> 00:03:06.500 In fact, one of the White House spokespersons had a temerity to suggest that banks have every incentive to lend, why aren't they, that's how they make money. 25 00:03:06.500 --> 00:03:16.500 Okay, so banks should lend. Well, entrepreneurs know how to make money, they don't have to be instructed in this by some punk from the White House. 26 00:03:16.500 --> 00:03:22.500 So, a dictatorship is well on the way, if we continue in the same direction. 27 00:03:22.500 --> 00:03:28.500 Let me go back to a lesson of talking about lying. 28 00:03:28.500 --> 00:03:32.500 Let me just mention something that Alan Greenspan had said. 29 00:03:32.500 --> 00:03:39.500 Now, he didn't say it in these words, but in the 1990s, in the midst of the huge stock run-up 30 00:03:39.500 --> 00:03:45.500 and the bubble in financial, in high-tech stocks, 31 00:03:45.500 --> 00:03:51.540 Greenspan's attitude was the following. He said or implied there is no bubble 32 00:03:51.540 --> 00:03:55.460 and if there was a bubble we wouldn't know about it because we don't have the 33 00:03:55.460 --> 00:03:59.180 tools to detect the bubble and if we knew there was a bubble we couldn't do 34 00:03:59.180 --> 00:04:03.500 anything about it. We don't have the tools to deal with a bubble and if we 35 00:04:03.500 --> 00:04:07.500 could do something about it we wouldn't because whatever we did would cause a 36 00:04:07.500 --> 00:04:12.600 recession in the economy. So this was an admission of the bankruptcy of modern 37 00:04:12.600 --> 00:04:19.640 Modern Macroeconomics, Modern Monetary Policy, and now we've seen it come home to roost, 38 00:04:19.640 --> 00:04:29.440 where from day to day these planners, policy makers, their court macroeconomists in academia 39 00:04:29.440 --> 00:04:34.160 do not know how to solve any of the problems that come up. 40 00:04:34.160 --> 00:04:37.120 They're just flying by the seat of their pants. 41 00:04:37.120 --> 00:04:41.880 They can't predict one day in advance what the effects of these policies are going to 42 00:04:41.880 --> 00:04:54.880 But to get back to Mises' lesson, Mises once pointed out, or pointed out a number of times actually, that inflation is an ideological as much as an economic phenomenon. 43 00:04:54.880 --> 00:05:03.880 Its ideological roots lie deep in the intellectual doctrines that hold sway among policymakers and the media and the public. 44 00:05:03.880 --> 00:05:10.880 This is true of a most recent inflation, which I would date roughly to the beginning of Greenspan's tenure as chairman of the Federal Reserve Board. 45 00:05:10.880 --> 00:05:13.880 and the Federal Reserve Board in the mid-1980s. 46 00:05:13.880 --> 00:05:19.880 So in my talk, I want to explore the ideological, doctrinal roots of our recent inflation 47 00:05:19.880 --> 00:05:24.880 that has led to the meltdown of the global financial system, or nearly so, 48 00:05:24.880 --> 00:05:27.880 and the various aspects and dimensions of the recent inflation 49 00:05:27.880 --> 00:05:32.880 and some fallacies and outright lies that have been spread about it. 50 00:05:32.880 --> 00:05:37.880 And finally, if I have time, I will also say a few words about the prospects for the future 51 00:05:37.880 --> 00:05:47.880 The possibility of hyperinflation, everyone's worried now about deflation, which is one of the problems, which has gotten us into this mess. 52 00:05:47.880 --> 00:05:59.880 The depreciation of the dollar in the last 25 years or so has gone hand in hand with the degeneration of economic thought, economic thinking on money and inflation. 53 00:05:59.880 --> 00:06:15.880 During what has come to be known as the Great Inflation of the 1970's, most economists and government policy makers abandoned the simplistic Keynesian doctrine that money did not matter when it came to explaining inflation and that monetary policy was ineffective. 54 00:06:15.880 --> 00:06:28.880 Inflation was reduced in the 1980's in the US and throughout the developed world as more and more central bankers began to heed the lesson taught by centuries of theory and history and terrain in the growth of their national money supplies. 55 00:06:28.880 --> 00:06:35.880 Unfortunately, by the end of the 1980s, there was backsliding into another pernicious doctrine, 56 00:06:35.880 --> 00:06:41.880 that the Fed neither had the means to control the money supply nor even the ability to measure it. 57 00:06:41.880 --> 00:06:47.880 In the US, Alan Greenspan was the most influential proponent of this view. 58 00:06:47.880 --> 00:06:53.880 The results were twofold. First, it allowed the Fed to obscure its key role in the inflation process, 59 00:06:53.880 --> 00:07:03.880 and second, it shifted the focus of monetary policy back to the manipulation of interest rates which had reigned under the Keynesian regime. 60 00:07:03.880 --> 00:07:16.880 This movement to downplay the central role that money plays in inflation and monetary policy has proceeded so far today that in a recent article in the highly respected review of the Federal Reserve Bank of St. Louis, 61 00:07:16.880 --> 00:07:26.880 They commented on this. In an article called The Effectiveness of Monetary Policy, Robert Raschi and Marcella Williams lamented, 62 00:07:26.880 --> 00:07:31.880 quote, money has largely disappeared from discussions on monetary policy. 63 00:07:31.880 --> 00:07:42.880 They go on to point out that in the 1970s, 11 of 22 central banks in industrial countries reported using a money and credit framework to formulate monetary policy. 64 00:07:42.880 --> 00:07:47.880 But by the 1990s, only two of these banks maintained this framework. 65 00:07:47.880 --> 00:07:58.880 They also reported a negative trend from 1970 to 2002 in the fraction of titles of articles in major economics journals that included the word money. 66 00:07:58.880 --> 00:08:02.880 Though the frequency of titles including the word inflation was relatively constant. 67 00:08:02.880 --> 00:08:09.880 So people kept writing about inflation, but less and less was money brought into the discussion. 68 00:08:09.880 --> 00:08:20.880 Finally, they cited a study that found the frequency of the word money in the annual reports of major central banks declined over the period 1996 to 2002. 69 00:08:20.880 --> 00:08:27.880 All of this has occurred at the same time that an increasing number of central banks have instituted so-called inflation targeting, 70 00:08:27.880 --> 00:08:34.880 a deliberate depreciation of the monetary unit at a fixed rate per year, usually between 2 to 3 percent, 71 00:08:34.880 --> 00:08:44.880 which we use the rule of 72, 3 percent, the price level will double, your purchasing power of your money will cut in half in 25 years or something. 72 00:08:44.880 --> 00:08:50.880 If it's more than that, obviously, then that period of time is shorter. 73 00:08:50.880 --> 00:08:57.880 A second ideological factor driving our recent inflation was the revival by central bank officials of deflation phobia, 74 00:08:57.880 --> 00:09:03.880 which I define as an unreasonable and hysterical fear of deflation. 75 00:09:03.880 --> 00:09:14.880 This was a calculated move by the Greenspan Fed that wanted to drive down interest rates to get the U.S. economy out of the recession of 2001. 76 00:09:14.880 --> 00:09:21.880 Thus, in November 2002, and this was really well planned out and took place step by step, 77 00:09:21.880 --> 00:09:26.880 in November of 2002, Fed Governor Ben Bernanke, who was not yet obviously the chair, 78 00:09:26.880 --> 00:09:36.360 A former Princeton University professor and prominent macroeconomic theorist delivered remarks to the prestigious National Economist Club in Washington D.C. entitled, 79 00:09:36.360 --> 00:09:46.960 Deflation, Making Sure It Doesn't Happen Here, just out of the blue, no one was talking about deflation, the public wasn't worried about deflation. 80 00:09:46.960 --> 00:09:51.960 There was a little bit of, there were a few hints that there was some deflation in Japan, but if you look at the record, 81 00:09:51.960 --> 00:10:01.960 The actual fall in prices in Japan, the fall in consumer price level, occurred one or two quarters out of ten years of their stagflation. 82 00:10:01.960 --> 00:10:05.960 And it was very, very minor, less than 1% per annum. 83 00:10:05.960 --> 00:10:16.960 Now, as a Fed governor, the topic, content and venue of Bernanke's remarks would have to have been cleared by Greenspan himself, if not actively suggested by him. 84 00:10:16.960 --> 00:10:25.960 And Anki began his speech by affirming his belief that the chance of significant deflation in the United States in the foreseeable future is extremely small, quote unquote. 85 00:10:25.960 --> 00:10:32.960 He further expressed confidence, quote, that the Fed would take whatever means necessary to prevent significant deflation in the United States, 86 00:10:32.960 --> 00:10:37.960 and moreover that the U.S. Central Bank, in cooperation with other parts of government as needed, 87 00:10:37.960 --> 00:10:43.960 has sufficient policy instruments to ensure that any deflation that might occur would be mild and brief. 88 00:10:43.960 --> 00:10:50.840 okay so that was his statement and then in typical Fed speak which was really 89 00:10:50.840 --> 00:10:56.680 pioneered by Greenspan he added so having said that deflation in the 90 00:10:56.680 --> 00:11:01.120 United States is highly unlikely I would be imprudent to rule out the possibility 91 00:11:01.120 --> 00:11:07.240 altogether okay so start worrying okay that that's that's the message here when 92 00:11:07.240 --> 00:11:12.400 a central banker even hints at something like deflation okay the markets start to 93 00:11:12.400 --> 00:11:18.400 He then went on to identify the cause of deflation, standard Keynesian terms, as quote, 94 00:11:18.400 --> 00:11:25.400 in almost all cases a side effect of a collapse of aggregate demand, which we've been reading since the 1950s in our textbook. 95 00:11:25.400 --> 00:11:33.400 A drop in spending so severe that producers must cut their prices on an ongoing basis in order to find buyers. 96 00:11:33.400 --> 00:11:40.400 Bernanke devoted the rest of his remarks to detailing the measures available to the Fed to prevent deflation from occurring 97 00:11:40.400 --> 00:11:45.400 and to cure it if such preventative measures somehow failed. 98 00:11:45.400 --> 00:11:55.400 Not surprisingly, all of these preventive and remedial measures amounted to little more than conventional and unconventional guidelines and techniques for creating money. 99 00:11:55.400 --> 00:12:04.400 This was really a rehearsal or a setting out of the program that was going to occur in recent months. 100 00:12:04.400 --> 00:12:16.400 For example, Bernanke suggested that to prevent an unanticipated fall in aggregate demand from irritating a deflation, from initiating a deflation, the Fed needed to establish a buffer zone for the inflation rate, quote unquote. 101 00:12:16.400 --> 00:12:26.400 In other words, we have to have inflation, so we don't have deflation. Inflation protects us against deflation. We have to have a positive inflation within a certain buffer zone. 102 00:12:26.400 --> 00:12:34.400 This means that the Fed should deliberately aim at inflating prices in the U.S. from one to three percent per year, but this is not enough. 103 00:12:34.400 --> 00:12:43.400 The Fed should also remain continually on alert for any sign of weakness in financial institutions and markets and stand ready to flood the financial system with inflationary credit. 104 00:12:43.400 --> 00:12:48.400 That's exactly what they're doing now. This is back in 2002 when he's talking about this. 105 00:12:48.400 --> 00:12:55.400 In case of, for example, a stock market crash or even a shock to confidence caused by a terrorist attack. 106 00:12:55.400 --> 00:12:58.960 okay now we've had a real estate crash 107 00:12:58.960 --> 00:13:02.840 finally even with inflation rates safely within the buffer zone so-called buffer 108 00:13:02.840 --> 00:13:03.520 zone 109 00:13:03.520 --> 00:13:06.520 if the Fed observes a sudden deterioration of the fundamentals of the 110 00:13:06.520 --> 00:13:07.680 macroeconomy 111 00:13:07.680 --> 00:13:11.680 such as a fall in investment or consumption spending it must act quote 112 00:13:11.680 --> 00:13:12.960 more preemptively 113 00:13:12.960 --> 00:13:16.620 and more aggressively than usual unquote for stall 114 00:13:16.620 --> 00:13:20.760 deflation you know think about this this is the only 115 00:13:20.760 --> 00:13:25.040 agency or organization that can create inflation 116 00:13:25.040 --> 00:13:26.940 Why is it worried about deflation? 117 00:13:26.940 --> 00:13:32.540 This is the one thing the Fed can do. It can do it all different ways, as we're finding out. 118 00:13:32.540 --> 00:13:41.160 It's not an inflation fighter, it's the inflation creator, the inflation generator. 119 00:13:41.160 --> 00:13:45.420 So what they wanted was a program by which 120 00:13:45.420 --> 00:13:47.100 any recession 121 00:13:47.100 --> 00:13:51.120 or any big fall in asset prices that had occurred in the late nineties 122 00:13:51.120 --> 00:13:52.660 in the high-tech industries 123 00:13:52.660 --> 00:13:57.460 could be offset by simply uttering the word deflation and scaring people. 124 00:13:57.460 --> 00:14:02.740 In the unlikely event that these and more precautionary measures fail to stave off the dreaded fall in prices, 125 00:14:02.740 --> 00:14:07.780 and the Fed has already reduced the federal funds rate to zero, they're already talking about that, 126 00:14:07.780 --> 00:14:09.460 which we're getting close to now, 127 00:14:09.460 --> 00:14:15.380 Bernanke assures us that the Fed has an arsenal full of additional weapons at its disposal, 128 00:14:15.380 --> 00:14:19.260 capable of generating the desired positive inflation. 129 00:14:19.260 --> 00:14:22.300 These unconventional techniques for money creation include 130 00:14:22.300 --> 00:14:33.100 Reducing and capping yields on medium and long-term treasury debt by committing itself to making unlimited purchases of these securities at a fixed price consistent with targeted yields. 131 00:14:33.100 --> 00:14:42.500 Well, they're now trying to do this with commercial paper and other securities, obviously, mortgage-backed assets, so on. 132 00:14:42.500 --> 00:14:51.600 Following the same strategy in the market for foreign government debt, which the Fed has been legally empowered to purchase since 1980, in other words, buying foreign government debt. 133 00:14:51.600 --> 00:14:58.600 and the outstanding stock of which is several times the size of U.S. government debts. If they run out of buying U.S. treasuries, they can begin buying government debt. 134 00:14:59.280 --> 00:15:02.520 But now that they can buy domestic 135 00:15:02.520 --> 00:15:07.000 paper of all kinds, they haven't yet gotten to the foreign debt. 136 00:15:07.000 --> 00:15:10.640 The circumvent the restriction on Fed purchases of private securities 137 00:15:10.640 --> 00:15:16.000 extends zero interest loans to banks accepting commercial paper, corporate bonds and even mortgages, 138 00:15:16.000 --> 00:15:19.800 talking about this in 2001, we haven't had the run-up yet, 139 00:15:19.800 --> 00:15:24.160 as collateral, thus effectively driving down the yields on these debt instruments, 140 00:15:24.160 --> 00:15:26.840 financing a massive treasury cut, 141 00:15:26.840 --> 00:15:30.160 and they're talking about this now, dollar for dollar by monetizing resulting 142 00:15:30.160 --> 00:15:33.600 deficits to the full extent of the lost tax revenues, 143 00:15:33.600 --> 00:15:37.640 or monetizing direct treasury purchases of current goods and services 144 00:15:37.640 --> 00:15:41.920 or financial or private financial and physical assets. 145 00:15:41.920 --> 00:15:43.040 So in other words, 146 00:15:43.040 --> 00:15:46.040 some sort of stimulus plan which is being pushed today, 147 00:15:46.040 --> 00:15:48.400 which would be financed 148 00:15:48.400 --> 00:15:55.560 nominally by cutting our taxes, but really by simply printing money to make up for the lost revenue. 149 00:15:55.560 --> 00:16:03.440 As Bernanke points out, this last alternative is tantamount to showering the country with money via Milton Friedman's famous helicopter. 150 00:16:03.440 --> 00:16:05.280 And make no mistake about it, 151 00:16:05.280 --> 00:16:09.720 Bernanke is proposing, or was proposing, inflation pure and simple, and plenty of it, 152 00:16:09.720 --> 00:16:13.900 as the panacea for an economy be set by a falling price level. 153 00:16:13.900 --> 00:16:34.900 This is explicit in the following passage, he says, and this is pretty famous now, this passage, it's been quoted a number of times, I think I may have been one of the first people to, the first time I saw it was when I quoted it back in, after I read this, in 2003, and he says the following, 154 00:16:34.900 --> 00:16:41.200 The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. 155 00:16:41.200 --> 00:16:43.400 A little parable may prove useful. 156 00:16:43.400 --> 00:16:47.100 Today an ounce of gold sells for $300. Those were the days. 157 00:16:47.100 --> 00:16:48.600 More or less. 158 00:16:48.600 --> 00:16:55.000 Now, suppose that a modern alchemist, someone who can turn base metals like lead and so on into gold, 159 00:16:55.000 --> 00:16:57.800 which people were doing in the 1600s, 160 00:16:57.800 --> 00:17:04.700 solves his subject's oldest problem by finding a way to produce unlimited amounts of gold that essentially know cost. 161 00:17:04.700 --> 00:17:12.700 Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. 162 00:17:12.700 --> 00:17:21.700 What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. 163 00:17:21.700 --> 00:17:33.700 Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemists had produced and marketed a single ounce of yellow metal. 164 00:17:33.700 --> 00:17:44.700 In other words, they're going to use the fear, the expectations of people, they're going to manipulate those expectations to bring about a fall in the price of gold to zero, even before they flood the market with gold. 165 00:17:44.700 --> 00:17:48.700 What has this got to do with monetary policy? I'm still quoting him here. 166 00:17:48.700 --> 00:17:53.700 Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. 167 00:17:53.700 --> 00:18:05.700 But the U.S. government has a technology, called the printing press, or today its electronic equivalent, that allows it to produce as many U.S. dollars as it wishes, at essentially no cost. 168 00:18:05.700 --> 00:18:11.700 By increasing the number of dollars in circulation, or even incredibly threatening to do so, 169 00:18:11.700 --> 00:18:17.700 Excuse me. Let me just shut this off. It's Bernanke. 170 00:18:26.700 --> 00:18:29.700 That was perfect. There we go, it's off. 171 00:18:29.700 --> 00:18:49.700 By increasing the number of U.S. dollars in circulation or even incredibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising prices in dollars of those goods and services. 172 00:18:49.700 --> 00:18:55.700 We conclude then that under a paper money system, a determined government can always generate higher spending and hence positive inflation. 173 00:18:55.700 --> 00:19:12.700 This passage is both true and chilling. Bernanke's analogy is based on correct economic analysis that the Fed indeed does have the power to bring about a collapse in the value of the dollar. 174 00:19:12.700 --> 00:19:22.700 What is so frightening is that the Fed governor, who later became Fed chairman, an allegedly moderate free market macroeconomist, 175 00:19:22.700 --> 00:19:38.700 Ernest, who was appointed by a Republican administration and has been rumored to be Greenspan's heir apparent, and in fact is now, has replaced him, dares to propose the use of such power as a remedy for a minor rise in the value of money. 176 00:19:38.700 --> 00:19:44.200 After all, the deflation of consumer prices in Japan, which Bernanke is so determined to avoid back then, 177 00:19:44.200 --> 00:19:49.200 has averaged less than 1% per year since it began in mid-1999. 178 00:19:49.200 --> 00:19:53.200 So it lasted for a few years, but it was less than 1% per year. 179 00:19:53.200 --> 00:19:56.200 And that was hardly Japan's main problem. 180 00:19:56.200 --> 00:20:00.700 Their main problem started in 1989 as a result of a bubble that they themselves had created, 181 00:20:00.700 --> 00:20:03.200 that is the Bank of Japan, by creating money. 182 00:20:03.200 --> 00:20:07.200 What I want to do now for just a few minutes that I have left 183 00:20:07.200 --> 00:20:12.800 is to show you, yeah, very quickly, some slides I brought 184 00:20:12.800 --> 00:20:16.040 showing that money should have never been left out of this equation, 185 00:20:16.040 --> 00:20:18.520 that they should have known that there was a bubble, 186 00:20:18.520 --> 00:20:25.120 that in fact there was a deliberate attempt to create 187 00:20:25.120 --> 00:20:28.560 a false prosperity in the US 188 00:20:28.560 --> 00:20:31.800 to avoid the problems with 189 00:20:31.800 --> 00:20:36.200 having a recession that went on into an election year. 190 00:20:36.200 --> 00:20:47.600 Let's look now. That's 1980. I've dated the inflation back to about 1985 when Greenspan took over. 191 00:20:47.600 --> 00:20:51.900 We see that the monetary base, which is completely controlled by the Federal Reserve, 192 00:20:51.900 --> 00:21:01.100 has increased tremendously from under $200 billion to near $1 trillion today. 193 00:21:01.100 --> 00:21:04.100 That is a constant, relentless increase. 194 00:21:07.100 --> 00:21:12.600 Now, taking two measures of the money supply that are official Fed measures, 195 00:21:12.600 --> 00:21:16.100 and I would measure it slightly different, MZM and M2, 196 00:21:16.100 --> 00:21:23.100 we see that it started at less than $2 trillion, 197 00:21:24.100 --> 00:21:28.100 and if you look at MZM, which I think is the better of the measures, 198 00:21:28.100 --> 00:21:37.100 went from maybe $1 trillion to over $8 trillion between 1980 and 2008. 199 00:21:37.100 --> 00:21:41.100 So it increased eight times. 200 00:21:41.100 --> 00:21:48.100 The increase is especially great after 2000. 201 00:21:48.100 --> 00:21:52.100 So the money supply, as we know, played a central role in all this. 202 00:21:52.100 --> 00:21:56.100 And no one talks about it. The media do not talk about it. 203 00:21:56.100 --> 00:22:06.100 The Fed funds rate, which they were focusing on, and which was really a misfocus, was what was being pushed down by the Fed. 204 00:22:06.100 --> 00:22:13.100 But in order to do so, they weren't just changing interest rates, they were infusing money, injecting money into the economy, 205 00:22:13.100 --> 00:22:19.100 to add to the reserves of banks that they could push the interest rates down by having more to lend out. 206 00:22:19.100 --> 00:22:24.100 The 30-year fixed mortgage rate followed suit as did all other interest rates. 207 00:22:24.100 --> 00:22:31.820 resulted, again, from this policy of injecting new money into the economy at a very rapid rate. 208 00:22:31.820 --> 00:22:37.100 The consumer price index, however, didn't increase as much as you would have expected 209 00:22:37.100 --> 00:22:40.380 because during the 1990s we had a tremendous amount of globalization 210 00:22:40.380 --> 00:22:44.500 as well as technological improvement in the high-tech industries in the U.S. 211 00:22:44.500 --> 00:22:51.060 So, as of the 1920s, the inflation was masked in terms of consumer prices, 212 00:22:51.060 --> 00:22:53.980 but not in terms of stock prices. 213 00:22:53.980 --> 00:23:02.380 We see in the 1990s, stock prices shooting up, then leveling off, then collapsing, 214 00:23:02.380 --> 00:23:06.180 when the first bubble was popped, the financial bubble, 215 00:23:06.180 --> 00:23:11.180 and then once again taking off and ending up at near 14,000. 216 00:23:11.180 --> 00:23:15.780 So asset prices bore the brunt of this inflation. 217 00:23:15.780 --> 00:23:18.380 You can see the bubble there. 218 00:23:18.380 --> 00:23:20.780 And it was broad-based. It wasn't just the Dow Jones, 219 00:23:20.780 --> 00:23:25.780 It was also the S&P, which is a much broader index of stocks. 220 00:23:29.780 --> 00:23:32.780 The U.S. exchange rate in terms of dollars per euro, 221 00:23:33.780 --> 00:23:45.780 you can see the depreciation there, meaning that we had to pay more dollars to get a euro going from around $1 sometime in 1999 per euro 222 00:23:45.780 --> 00:23:51.420 and rising all the way up to about $1.55 or something at its peak, okay? 223 00:23:51.420 --> 00:23:58.380 That's another indication of the tremendous depreciation and of the asset bubble that was being formed, one minute, okay? 224 00:23:58.380 --> 00:24:06.300 We see the home price index, now this is not a linear index, these are rates of increase in home prices, okay? 225 00:24:06.300 --> 00:24:18.060 So at the top here, home prices for the U.S. were increasing at 20% per year on a national level, 226 00:24:18.060 --> 00:24:20.900 and they were at 16% for a while. 227 00:24:20.900 --> 00:24:30.540 I mean, who could deny that there's a bubble there by looking at these data, and then the crash. 228 00:24:30.540 --> 00:24:36.540 So, home price is now falling at an annualized rate of about 16% per year. 229 00:24:39.540 --> 00:24:43.540 Now, one last graph here. 230 00:24:43.540 --> 00:24:47.540 The top graph, investment as a percent of nominal GDP, is very important. 231 00:24:47.540 --> 00:24:50.540 We often forget, we look at stock prices, we look at real estate prices, 232 00:24:50.540 --> 00:24:56.540 we forget that there's a real component or real complement to the boom in the financial markets and real estate markets. 233 00:24:56.540 --> 00:25:04.260 and that is the actual investment in goods and in producers goods okay and so 234 00:25:04.260 --> 00:25:08.900 you see that it always shoots up well what it showed was it always shoots up 235 00:25:08.900 --> 00:25:14.300 right before recessions and then and then it comes down during recessions so it 236 00:25:14.300 --> 00:25:22.140 went from something like 12% of GDP up to about 16% at the end of the 90s fell 237 00:25:22.140 --> 00:25:31.140 fell off back down below 14% and then by the 2006 or so rose again to around 16% of GDP, okay? 238 00:25:31.140 --> 00:25:36.140 So we had this real boom in investment, which of course they never really look at. 239 00:25:36.140 --> 00:25:39.140 So I'll end there. Thank you.