Profits in a Fiat-Currency World

0:00The local women's health symposium had invited a preacher to give them a talk. When the minister's wife asked about the topic, he was too embarrassed to admit that he was asked to talk about sex. Thinking very quickly, he replied, I'm going to be talking about sailing. Oh, that's nice, the wife said. The next day at the grocery store, a young woman who had attended the lecture approached the minister's wife and said, that was certainly an excellent talk your husband gave. He's quite an expert and he has a unique perspective on the subject. Somewhat chagrin, the minister's wife replied, gee, funny that you should think so. I mean, he's only done it twice. The first time he threw up and the second time his hat fell off.

0:53Being too embarrassed to tell my wife that I was going to speak about gloom and doom again, I told her that the subject of my speech was going to be why one should buy junk bonds for one's retirement fund. If you happen to see her tonight, please don't broach the subject. Okay, all kidding aside, it's all been said today and it's hard for me now to speak after so many good speakers and everybody already haven't said something about the bubble economy and unsustainable growth and unsustainable boom and the coming crash, I imagine that was also mentioned. So even though I agree, it's hard to go over it again.

1:46So maybe I would like to sort of restrict some of my remarks to looking into the basic problem. The very basic problem is not Mr. Greenspan and it's not any of the central bankers of the world per se. It's the system. The fiat money system is highly unstable. It's a system is something that will create over and over a crisis, and you don't have to be a genius, but just look at the evidence, last 30 years, you've had a crisis after crisis after crisis every single year practically, you go back to the late 60s, the inflation, the Vietnam inflation, the 70s, the tremendous inflation in the developed world, the aftermath of parts of those inflations, the 74 credit deflation, Incredible, incredible deflation, credit deflation, the 1982 credit deflation, the 1985-86-87 boomlet followed by a crash, the 1987 crash, the 1988-89 reflation that created a boom in real estate and of course the disaster that followed with the savings and loans collapse and probably all the banks, almost most of the banks in Texas and Massachusetts

3:14The billions and billions and billions of dollars, hundreds of billions of dollars, use taxpayers' money to clean up the mess. And that's not just the United States. In the mid-70s, the hyperinflation in Britain, when the IMF was called in, and the secondary banks all collapsed, all secondary banks collapsed in Britain. The Latin America hyperinflation of the late 70s, early 80s, which literally destroyed the banking systems in Mexico and Argentina. Even Brazil at that time. The poverty that ensued after that, the tremendous loss of income, the indebtedness that followed after that. The mid-80s in the Nordic countries, Sweden, Finland, Norway, 20% of their GDP has been used to pay to clean up that mess.

4:04Almost every single bank in those countries went under. Every single one, every single part of the world was affected in one way or another by this kind of unstable monetary system, a fiat money system. And of course the great bubble, the one that we all know, that we all follow every day, the Japanese bubble of the mid to late 80s caused by, again, increases in money that were way above what the economy needed. At the time, the Japanese central bank did not know that was creating a bubble. They admitted today. They didn't know it was creating a bubble. And it's been 10 years since then, and they have not been able to crawl out of it. So, it's a sad history. It's a very sad history.

4:53And you may want to ask, why does it happen? Why is it that this can happen? And we have intelligent central banks. They're an intelligent group of people. And they are intelligent. They all have degrees, and some of them have PhDs, and there's nothing wrong with a PhD. I mean, these people are intelligent. Why should central bankers be so wrong? Why do they cause these kind of things? The truth is that Ludwig von Mises already spoke about this phenomenon 70 years ago when he predicted that the socialist and communist economies would fail, would go under. And money is the same thing. In a centralized economy, you try to control the amount of shoes and the amount of shirts and the amount of butter that the economy needs and is going to produce.

5:40And they never get it right. Never, never get it right. There's either millions of shoes in a warehouse and a shortage of butter or tons of steel rot in some place and they never get it right. There's always a shortage of something and a surplus of something else. Meaning, central authorities, no matter how intelligent they are, cannot create the right amount of anything. And why should it be any different with money? They are creating money, they're setting a rate. I mean, think about it. If there would be a gigantic marketing board in this country that would say, okay, we're going to decide on the amount of bananas that we're going to produce. and knowing people's taste and population increases and so on. And they would set a price. How many times do you think they would get it right?

6:25The answer is never. They will never get it right. And yet we have these philosophers, these banking philosophers, discuss meat, eat our money at these fancy places, I mean, talk in the press and discuss quarter point increases and how they can manipulate and fine-tune a price, the price of money, which is the same thing as manipulating or fine-tuning the price of bananas. They'll never get it right. And this is the reason why fiat money systems don't work. But the evidence is staring us in the face. And whereas in agriculture, we have given up marketing boards and we have given up price supports and just about everywhere we have given them up.

7:12and the world has been able to produce food and feed the world without a problem. When it comes to money, we still persist with the same errors. The central bank that just manufactures money at its own will, thinking and estimating what the level should be and estimating what the correct price should be. It's idiotic. It doesn't make any sense. So, I don't think I've added very much to what was said before. I think maybe I said it in a more layman's terms, but this is a serious problem. This is not just Greenspan and it's not any other central bank, or Duesenberg from the ECB, or any of these people, who, by the way, you'll note, how many times these people appear in the press.

7:58They are continuously trying to talk a market. This verbal manipulation that goes on is incredible. I have to read this stuff every day, and it's unbelievable. Every single day, one guy says one thing, one central bank, and then another guy says something else, and another Federal Reserve official, and everything done to manipulate people's expectations. Now, you don't need that if you had a sound, healthy system. You wouldn't need that. So, having said that, I probably ended my talk because the profiting from a fiat money system is a little bit too difficult. I left it to the end. I don't want to leave you with fallible forecasts and temporal truths.

8:45And I'm afraid to taint today's conclusions should my investment recommendations or my investment advice prove wrong. So what I think I would like to do, and I want to make just one last point before I open it up for questions. I think that investment success today may have more to do with a subtle understanding of the political climate and the political will than with economic theory. I make that statement and I say that political analysts with an understanding of Austrian economics will probably do better in these types of markets than economists and financial analysts like ourselves and it's a sad point and it's sad to say but I believe it because Every decision, as we heard before, every decision that is made is a political decision and there has to be a political will to bring the house of cards down and start again.

9:56If there isn't, we can ratchet upwards and continue to ratchet upwards with ever greater degrees of vulnerability. We went from a Mexico crisis to an Asian crisis to a Russian crisis. Now think about it, a Russian crisis. Russia is a small player in the world. Less than 1% of GDP. I don't know what the numbers are. I mean, we don't know what the Russians produce or don't produce. Probably nothing. Maybe it's a negative GDP. But that Russia can actually create such havoc that the Fed had to lower rate 75 basis points, that the markets went into a frenzy, that you couldn't find bids that day or that month. It just tells you how sick the system is. We have created enormous leverage in the system, and that's all because the Fed has tampered with that variable that they don't know how to tamper with, because nobody really knows how to tamper with that variable.

10:58So having said that, I would like maybe to open the forum for questions, and maybe we can discuss investment ideas or anything like that, so yeah. The bank system has a few so-called monopolies that it's quantitatively easy to use. They've been criticized for that by various market systems and by the Ministry of Finance. Yet their interest rates are, that I would imagine, well below the so-called natural. I guess my question is what do you think they're doing? Is it just, is it just re-eclading or re-eclading? Japan is undergoing a deflation of assets, and really simultaneously a deleveraging.

11:49So we have this enormous credit that was created during the bubble, and the credit was used to inflate asset prices. And instead of allowing it to collapse over one day, which it should have done that maybe in 1991, Press the accelerator, you know, let the whole thing come down and close the banks and close all the banks that were no good, maybe 95% of them. They extended it and they kept on providing some support all along. So they are deflating very slowly. The air is coming out very, very slowly. Asset prices have declined now for eight years in a row, if you talk about at least real estate prices. And on the credit side, for instance, the banking system is liquefying itself. If you notice the latest figures, let's say for the past year, bank loans are down about 6% or 7% year over year.

12:40Now as the banks are no longer lending, they now are pulling back, consolidating and buying governments. So their asset side is getting more liquid and more secure and they're writing off that debt, of course with taxpayers' help. But what's happening is that they're liquefying and there's a credit deflation that's developing. Now, in a credit deflation of that sort, if the central bank would not create new money, chances are that you would get a real price deflation too, maybe four or five percent a year price deflation. The fact is that the Bank of Japan is sort of midway now. They're creating a certain amount of money. The monetary base is increasing around 4% a year, money supply is not increasing quite that fast.

13:30I think monetary base is increasing, sorry, 8% a year. Money supply is growing about 3-4% a year, which means there's still leakages in the system. Something similar to what happened to us in the 30s, where our monetary base was increasing, but money supply was decreasing because it wasn't sufficient, okay? And so Japan is sort of playing a midway. The Central Bank of Japan, I think, has a trauma, a trauma, because of what happened in the 80s. At that time, in order to resist a rising yen, they monetized, that's what they did, they monetized, what they did is they intervened and allowed the intervention to expand their money supply and so created a bubble. So the way I see it is the Bank of Japan is fighting very hard not to do that, not to do more than what they're doing.

14:16They're already doing enough. I would, if I was in their shoes, of course, I would say don't do anything and don't increase the money, but don't decrease it and let everything come down and liquidate it. But given the political situation, I think the Bank of Japan so far has done a pretty good job, meaning they have inflated a little bit, allowing credit to liquidate, allowing asset prices to come down. and the fiscal side is the one that has actually provided the support to the economy. So, in all, I would say that Japan is... If I would grade it and A is tops and D is failing, I would say Japan is around a C plus to a B at the moment.

15:07The problem is that the brilliant economists all over the world are pouncing on the Bank of Japan They're saying, why don't you intervene now and create, allow the intervention to inflate the money supply so you can get out of this deflation. So that new cycle of inflation is not good. And this is the problem why one can't trade it with a lot of confidence. And this is why I come back now to the question of politics. We're not trading economics. We know what the economics are. We know what the economic consequences of that are. When you talk about trading markets, do you think they can?

16:11accelerates. If inflation were to get over 3 or 4 percent a year, I think there would be a political will that develops to stop inflating. And then we'll start the liquidating part of this cycle. Okay, so if LTCM appears again and inflation is 4 percent a year, probably at that point, if it's not 4, maybe 5 percent a year, probably at that point the Fed will There's got to be a point at which we can galvanize his politicians and stop the game. But so far he's been extremely lucky. All we have had is rising prices and stocks. Everybody likes it. There's nobody that wants to lower prices.

16:59And there's no cost to that. There's no apparent cost to that. We haven't seen yet an apparent cost. Now, your point on derivatives is, derivatives is really another form of credit, and tampering with interest rates creates an explosion of credit. We have leveraged up the system in a phenomenal way, just a phenomenal way. So derivatives is another side of that. Oliver, in November, in the former Moscow and New York, the November... Murray was very extreme in that view, that you can actually have non-counterfeit money. I think that Murray believed in 100% reserve banking, if I recall.

17:48Murray Rothbard, I assume, Murray Rothbard. Murray Rothbard was one of the great scholars in the Austrian movement. Am I right that he believed in 100% reserve backing? Now that's probably a little bit too extreme for the moment. It's probably too extreme and I think maybe it will take another 75 years. But it is possible to move away from central banking, that I believe. And free banking is the alternative, the real alternative. Free banking that's practiced by the Scottish banks in the 19th century is a very sound alternative. There's no central banks. and it works well, it worked very well too. So there are ways that we can get around or get away from discretion.

18:33The problem here is human discretion, central bankers, no matter how good they are and how smart they are and how much their good intentions are, we still are going to have a problem of manipulation, of getting it wrong. So, if you can get rid of central banking, and there's ways to do it, and there was a tried way to do it, 19th century banking in Scotland was one of them, that could be one alternative. I would love to see that. I'd love to see that. So, I don't know what to say. Maybe if you lived long enough you would have... You said a few moments ago that you don't trade the economic...

19:21No, no, no, I didn't say that. I trade the economics and I don't do so well. That's the problem. What I said is that you've got to have a political sense, better than an economic sense in some of these things. Because you can have this economic scenario, and I can have fainted the same scenario back in 1992 or 1993, When Greenspan lowered rates of 3 percent, which by everybody's admission was below the natural rate, and he did that in order to save the banking system, I could have painted the same scenario and said, this thing is unsustainable, we are creating an incredible explosion of credit, at some point it's going to collapse, but when? But when? And I wasn't able to count on, and, for instance, Greenspan doing what he did in 88, in the name of systemic risk, he reflated, right?

20:18Or just three months earlier, it was tightening, not because the stock market collapsed, he reflated, or what he did during the Russians' situation. If you're not an astute political analyst, you will miss it because you will keep on looking at the natural consequences of what's happening and make decisions and make conclusions, arrive at conclusions that are not going to be realistic very often. So that's why I say that a good political analyst who understands how, what's happening now in Washington and what the pressures are and what the central banks are finally reacting to, may be better in a way than an economic theorist. I would love to have that trading metagia. I'm looking for that, desperately.

21:09My trading metagia has been basically economic, basically economic. And in the bull market of the past three years, I mean, I wrote a piece in, what was it, in April of 97, called Fraying at the Edges, in which I basically laid out the scenario that starting from the outer corners of the periphery, and that was the beginning, Thailand had not yet exploded, it was just about to, that the whole thing would catch on fire starting from the periphery because of credit. And I laid out the whole scenario. Now, it was stopped. It was stopped. We had what's called muddling through, because you had the World Bank intervene, The US intervened and the Treasury intervened and they provided help to Indonesia and then to Korea and then to Thailand.

22:02The system was not allowed to fall. That was a political decision at the time. And this continues. So during that period of time, if you were trading on the basis of economics, you weren't doing well.

22:19That's the best scenario. That would be the best scenario. If that can happen, you see, the problem is this, that the leverage in the system, the leverage in the security system, is such that it won't allow, it may not allow the market to deflate slowly, because you have a lot of derivatives, you have a lot of credit, and it will be difficult for the market to, it will be difficult, I'm not saying it's not possible, it will be difficult for the market to deflate slowly. The Japanese example is interesting. If you don't, there's almost like a natural law. You either have very sharp corrections and they're very short, or you have very long corrections and they're shallow. So you have one of the two. For instance, the classic one that I remember because I was involved in trading and talking to the people in government was in Chile, 1982, there was a tremendous boom, 1978 to 1982, then suddenly there was a shortage of capital because of the Falkland Island problem and Latin America was cut off

23:28from capital, the boom came to a sudden end, the government refused to monetize, the economy went into a tailspin, GDP fell 21% from top to bottom, 21%, we're talking about half a Unemployment went from 5% to 33% in I think less than a year. But it lasted only a year and a half. It went like this, like a V, it went back up. So if you allow it to liquidate, if it falls quickly and if it goes down, I don't want to use the expression, but if it hits the fan, then it lasts a short period of time. But you get it over with. If you don't do it that way, you do the Japanese way, it's Chinese torture or Japanese torture.

24:14It's like 10 years. You had a question. This gentleman was trying to be fortunate. That's okay? Okay. Monetizing debt means that the government buys its own debt. One debt. Central bank, one arm of the government, prints money to buy the fiscal debt, the treasury debt. And so it's one piece of printed paper in exchange for another piece of printed paper. And then you have a lot of notes circulating around. Over there, in the back.

24:52Certainly we act faster today, and the certainly larger, the speculative funds, are certainly larger in relation to resources of central banks, but they still end up impacting, affecting the one variable that makes a lot of difference, which is the price of money. So, to answer your question, markets will react faster today, but I think that central banks can temporise for a long time So what we can do, particularly, is to wonder if you can find a more or less cost-effective model. The theory of the vigilantes, the bond vigilantes.

25:55with a view to what the Fed will do. And so we have a game of mutual influence. We're not really trading bonds in a vacuum. It's like, what the Fed will do next week or two weeks from now will be tightened when it won't tighten. So the volatility is because of duration. You have a much longer duration asset. But the fact of the matter is that they only fluctuate on the basis of what the Fed is going to do. So, I don't buy the argument that the bond market can do much. The bond market is guided, yes. Yes, well, let me just read three questions in one if I may, actually a bit. Neither of the three. Neither. No, I think that what I'm trying to do is maybe try to acquire a little bit more, as I said before, political savvy, trying to read a little bit better the minds of some of these people in terms of what is likely for them to be able to do politically.

26:51Like I think that I detected a shift in Greenspan's June speech in which I think there's a shift there that he wants to bring the stock market down. He won't accept this market going any higher and he'd probably be happy if the market went to go down 20%. I assume that number because their calculations are showing that the market is overpriced 20 or 25%. The tenor of the speech, the references to the stock market, the many references to the stock market, makes me think that that's probably what he's talking about. So there's like a... I sense a certain political decision, a political will to bring the market down a little bit. Will he allow it to go down 30-40% or 50% or 60% or 70%? I don't think so. Not in the first shot. And not unless he's forced by other events.

27:40So, what was the first one? You repeat the question. Okay, I'll repeat it. I'll repeat it. They're good questions. What is likely to bring down the dollar? His assumption is, and probably not unreasonable, to think that the dollar is a little bit overvalued. And what can bring it down? That's the question. And what's the catalyst? I think the US stock market is the key. I think that the U.S. stock market is the symbol practically for U.S. strength and virility and a breakdown of the stock market will probably cause capitals to flow out. In other words, the U.S. is financing itself. The U.S. is spending more than it's making. That's a current account deficit. It's getting larger. It's about 3.5% to 4% of GDP. It's pretty large.

28:30How do they finance themselves? Well, they finance themselves by making a very attractive capital market. And so foreigners are buying Yahoo, and they're buying Amazon, and they're buying everything else. I'm pretty clear that there's a confidence in the dollar itself. Well, the confidence in the dollar comes from the boom. It's not the dollar first and the boom second. It's the boom first, the dollar second. The boom... Central banks in Thailand holding the dollar? Sure. No, they're holding dollars because the dollar is 70% of the world's trade, it's in dollars. Every central bank in the world has to have a certain amount of dollars. And world trade is about 60-70% invoiced that way. So don't look at central banks, but look at individuals. Why do individuals hold dollars? The main reason is because it's the deepest capital market, the deepest money market, and the most attractive capital market and money market.

29:22It's where you make money. And when that stops, and when that stops, the dollars flow out. And the amount of dollars that flow out will not allow us to, will not allow the U.S. to finance its current account deficit, at which point the dollar begins to fall. So it's intimately related. And I believe that if you want to be short dollars, you probably have to first be short I'm not sure the dollar is strong, but the US economy has been the strongest and the most performing economy so far. Europe has been very weak, high unemployment, a lot of problems, labor problems.

30:08Japan has been in a depression practically, so there is no economy that is attractive enough. The most attractive economy in the world is the U.S., has been the U.S., and this is why dollars come here. Now, what was your second? My views on gold change quite radically in the last two years, I think two and a half years, maybe a little bit more. When it became obvious to me that the central banks of the world had finally made a rational decision, are national in the sense of where they stood. They stood in a floating rate regime that does not need reserves, does not require reserves, doesn't require gold, doesn't require anything.

30:54You can have a central bank with no reserves if it's a floating rate regime and if it's clean floating. So the decision that they made, which began with the decision made by Holland and then by Belgium and then Canada has been doing it for 15, 20 years, and the Bank of England, Australia, Argentina. Disposing the gold, there's 12 to 15,000 tons of gold in central bank holdings. That's a lot of gold. It's about maybe five, six, seven years worth of usage. So I began to realize that demonetization, the end of gold as being a monetary asset, would imply lower prices for some time until the process of the monetary asset Until the process is ended and I don't see any good process for gold until, and this is very important, until we get all the central banks that want to sell, get together and pool the gold together, maybe through the BIS, the Bank for International Settlements or the IMF, and auction it off over five years.

32:04At that point, the announcement will make the price of gold go down, but that will be the end of the bear market. So, what has got to happen, I think you've got to think in terms of production. Gold production continues to increase year after year. Even this past year, gold production increased, which is remarkable. The price has gone down 50% in the past two and a half years, and the production continues to increase. Central bank selling will have to displace production. We'll have to displace it in order to be able to absorb that central bank selling. So we'll have to have production cuts of 20, 30, 40% to absorb that selling that's taking place. It's a lot of selling taking place.

32:49Yeah, but at lower prices, at falling prices. If you want to stop the falling prices, then you have to replace it completely. So at some point, you need to have production of gold go down from 3,500 tons a year, from 3,000 tons a year to maybe 1,200, 1,400 tons, and accommodate continued central bank selling. So what was your third question? You know, you're 100% right. I mean, what he's saying, I'm going to repeat it because it's important. He's saying that I made a statement that politics is very important at this point in time, but in the long run, economic theory will always will out, like they say, value will out, and it's true.

33:39The problem is that we trade, timing is important for us. We may be right, but we're dead, so we have to time it better. And ultimately, this, what happened in the past five years, will end in disaster. There's absolutely no doubt. Whether we have a credit deflation or whether we have some acceleration of inflation, but this will end in disaster, what happened in the past five years. But when? And I don't want to be, you know, short of the wrong time. Mr. Menger, can you follow up with this question first? It seems that the survival of an athlete is one thing. I'll tell you something interesting. I heard, and I don't know if it's true, but I heard that most of the losses that took place in the Great Depression, investment losses, were not losses suffered in the first round.

34:33There were people who lost money because they thought prices were cheap over the subsequent four years. And that's where most of the losses took place. You know, maybe it's anecdotal, but it makes sense. I think that's the difference. There will be the difference between the political players and the ones who have some economic sense. The pure political players will look at what's called the presidential cycle, they will look at things of that sort, they will say, well, there's been a will now, some political will, to bring down the bubble. And then when the bubble goes down and deflates a little bit, they'll jump back in and say, that's it, it's over. But if you understand the process, you may be able to survive a lot longer. So economics is very important. You have to marry it.

35:20So when you say that political analysts are very, very good, if they have the proper economic background to them. It seems to me that in the late 70s, the Fed went monetarist. There were a number of changes in the 70s. In the latter part of the 70s, the Fed went monetarist, which had decided that the best thing to do was to follow Milton Friedman and just to look and regulate the growth of money supply. By the very late 70s, inflation had gotten out of hand and then Paul Volcker, and I think today if I look back at that time, I didn't realize how courageous he was, but he applied the brakes and he managed by way of, I think he managed by way of reserves, excess reserves in the system.

36:07But whatever the case is, he provided much less reserves to the system. There was a crunch, and interest rates, if you remember, went up to 20%. They gave up monetarism, and almost after that, two or three years later, they gave up monetarism because they found very little correlation between the measures of money supply that they were looking at and economic activity and inflation. They gave it up. And the Greenspan years are years of pure discretion. How can you compare that to writing a paper for the Federal Reserve in the middle of the year?

37:05Which monetary system would be better? It's hard to judge it independently because one group draws on another group. For instance, the Volcker experiment, what Volcker did by basically saying that he will end inflation and raising interest rates of 20% and then bringing on the depression of 82, he created a tremendous amount of credibility for the Fed at that point. The Fed had shown that it will not allow inflation. Now, Greenspan has drawn on that credibility for many years, so it's hard to say whether his system is any better. I mean, what he's done is benefited from the extraordinary credibility of the Fed gain at that point.

37:51So I can't decide. and Chewing a Destined Corpse.

38:16So it's not just deciding, well, I have to look for the politics...

38:26I don't know when the music stops. Not to participate, I wouldn't go along with it, but I would want to know when it stops, I want to know when that will, that political will has changed. That's what I mean. I just wouldn't be short until such time as I get an idea. You wanted to ask me something before. What are the two possibilities of a short, sharp drop?

39:19I don't know the politics behind that either, but I would imagine that the powers-to-be don't want the big banks to fail, the big investment banks to fail either. Just getting back to gold for a second. Some people would argue that price of gold wouldn't be determined by the monetary system. Well, you know, the question, the gold question is both a relative and an absolute question. I would say that given what I've mentioned before, the demonetization process, that gold will either fall in absolute terms or at least fall in relative terms. So in your scenario, if we had a re-acceleration of inflation and commodity prices were going up, you shouldn't be betting on gold. You should be buying live cattle or pork bellies or silver or something, because gold will be depressed by its relative supply problem.

40:12So, you know, it's true, by the way, that markets have bought, from an investment point of view, this is much less buying of gold. Markets have bought the idea of low inflation and financial assets that compensate you for it. You can do very much better than the tips that these treasury index linked securities, these inflation index linked securities, they pay you 4% a year, index to the rate of inflation. That's pretty good. But the amount of the jewelry demand is tremendous. We are absorbing enormous amounts of producer selling and government selling. It's tremendous. I agree. Investment buying is not strong. Investment buying is not strong. What's strong is jewelry, fabrication demand.

40:59I made a point about investment, because I think he was talking about a demand for money, for gold as money, or as fear, in case of another inflation. The investment demand is dead, but the jewelry demand is very strong, and it's going to absorb all the supply, but it's going to take time. You're going to have to sell all that gold. Almost every major stock market crash has been preceded by an inverted yield curve?

41:52It's possible to have a very large decline without an inverted yield curve, but surely if you get an inverted yield curve, and we're close, you know this, we are close, surely if you get an inverted yield curve, you better get out. What I understand is the Austrian explanation for the term low inflation rate is... I'm not sure that that's the Austrian view. I think that that's the popular view. And it may not be wrong that imports are maintaining a sort of a damper on prices. And you can see that because your current account deficit is getting larger. Your trade deficit gets larger and larger, so it's maintaining some kind of a damper, right?

42:37But it will start working the other way. When the dollar... This is the sequence, and I started mentioning it to him. The sequence is, the stock market comes down, the dollar goes down. When the dollar goes down, the price inflation goes up. So inflation will follow, because we have repressed inflation with a very strong dollar. So as the dollar goes down, the inflation will come out of the system. Instead of 2% inflation, you may have 4 or 5% inflation.

43:08What about deflation in prices, by the way? There is no such a thing in our system. So how would that impact us? How would that matter? So, how would that impact us? How would that matter? Be very bad. It could be very bad. I mean, you can have business failures, I mean, huge business failures, unemployment rising. I don't need to paint the picture. I mean, it could be really bad. Go back to 74. See what happened in 74. In 74, you had a very classic. You had inflation, and then at the end of that period, And the recession of 1974 was very severe. Unemployment rose above 10 percent.

44:02Why didn't we get a general inflation? Because money supply doesn't really go down. The only other time that you ever had deflation, price deflation was in the 30s. And that's because the money supply was cut by a third. If money supply doesn't change, then you can get asset deflation. Asset deflation, houses, stock prices. But the car fare, the room in the hotel, the things like that, so we're not changing very much. You're not going to get real deflation. Deflation and inflation are monetary phenomena. If there's no change in money supply, then you're not going to get it. In fact, if the Fed hadn't inflated for the past 10 years, chances are that we would have had a deflation of prices of 3-4% a year.

44:51Because productivity has been very strong, very high, and we would have had a wonderful, wonderful situation. People who lent money would have gotten back more than what they lent. The lenders would have been in great shape. The borrower is not so good, but the lenders would have been in great shape, from the lender's point of view. If the Fed would not have inflated money, you would have had price deflation.

45:42I would never buy a 30-year government bond, but maybe I would buy those index-linked bonds, because I'm guaranteed that I will not lose money because of inflation. Of course, taxes are a problem. They tax the inflation gain. I mean, that's... I hope we better set it off for a little bit. Thank you very much.