Question and Answer Session

0:00Could you have overinvestment across all of us? Actually, you know, that question would give you different answers, depending on whether you read Hayek or Mises. And it's Mises who does argue that there can be, in fact, he says even overconsumption, which is, and the use of resources even at the finest things. But on top of that, superimposition on top of that is a relative misallocation. So what I would argue, and do argue in time of money, is that you get both. That you get an increase in investment all around that's very temporary, that's inherently temporary.

0:47And at the same time, a pattern of investment that actually pulls the Hayekian Triangle at both ends against the middle. You get excessive consumption as identified by Mises, and you get excessive investment in the long-term sectors as recognized by both Mises and Hayek. So I would say you get both, and I would say that the market mechanisms that bring the boom to an end are very critically tied up with the malinvestment aspect, because if you think about it, what's happening, and again I'll go back to Frank Shostak's pool of funding, at the very time the pool is being drained by consumers, investors are setting off on a course that would require a large pool, okay?

1:35And so as that process moves forward and as stages of production in the intermediate range mature to fruition, the consumable output simply isn't as great. And so at that point consumption has to be reduced. In fact, that's the reduction in consumption that I think is best described by the term forsake, which is integral to most all the Austrian accounts of the business cycle. You mentioned that a bad policy begets bad policies. I've heard this question before, but why doesn't that inevitably lead to the U.S. being some sort of Marxian utopia? Is there some cultural constraint that bad policy eventually leads to good policy?

2:22Well, no, not really. I'd like someone to guarantee me that we're not turning into a Marxist utopia, first of all. But, okay, with a certain gradualism, I suppose, but if you read certain publications, including some of them that claim to be conservative, you find a certain wholesale adoption of themes that used to be those of the Marxists and so forth. Certainly neoconservative and socialist. Yeah, I think that's fair enough in several senses. Well, it may be, partly, that it's cumulative. One, intellectual error can just, apparently, persist for quite a long time, but it's not just that. It means, once the process has gone on long enough, you've got a whole class of entrenched people who believe this, but it's also in their interest to have other people believe this.

3:20And when these people, in effect, nationalize the educational system of the entire country and creates the predominant paradigms that you get from first grade through the universities. And they also have an interest in perpetuating these views. It becomes very difficult for anybody to sort of think their way out of the paper bag. And also, again, it's also partly maybe just a kind of logistical problem that it's much simpler for a few sugar producers to go to Tallahassee or send lobbyists to Tallahassee to figure out some way to raise the price of sugar, then it would be for all the sugar buyers in Florida to organize themselves to save that couple of cents.

4:08And it's just a few pennies on the dollar for the single consumer, but it means a lot to the guys who send the lobbyists. Let me ask something. I think Mises' explanation of this has to do with the notion that we tend to lose freedom gradually. You tend not to see a society that's moving gradually towards freedom. Joe, this is sort of a sidelight to your talk, but I was curious to meet the other people.

5:03Was Charisma the main explanation for Roosevelt's 36th re-election, given that he hadn't solved the pressing problem that got him elected?

5:33You always have to allow for that. But yeah, I suppose that the charisma was a big factor. And although, I don't know, there were people, John T. Flynn was one who said that he voted for Roosevelt the first time he ran when he appeared to be a Cleveland Democrat and never voted for him again. And my father did the same thing, voted for him once and then never again. Apparently some people didn't react badly to this set of policies that were being put in place and voted against him on that basis, but maybe thought this might work, or maybe somehow did create this notion that something was being done. I mean, you've got to remember, they're putting all these people out there with shovels and planting trees, and they've got a lot of activity going, and they're getting a lot of press, and they keep a lot of excitement, and they're slaughtering little pigs to raise the prices and all of that.

6:27This isn't all of that. So maybe that was enough. Can I say this? In that particular election, the campaign sloganeering was very candid, very explicit. It was, span, span, span, elect, elect, elect. You got a lot of votes, with or without charisma. And there was people after the election that said, they told me if I voted for Outlander, there would be more years of depression. So, I did, and there was. We also remember that Roosevelt took us off Prohibition, and that made a lot of people happy. Yes, Dr. Garrison, in your article, The Classic Hierarchy and Hangover, you talked about MGM growth.

7:12And would you agree with some academics subtracting money market funds from MZM in their calculation or money supply work? Quite possibly, but of all of the statistics that are reported routinely by the Central Bank itself, I tend to look at MZM rather than certainly rather than M1 or the monetary base. I think it's a better indicator. Dr. Garrison, would you comment on the so-called hedonic price adjustments that are used by government statisticians to artificially make productivity and output look better, and also inflation look better, sort of artificial price adjustments that give a totally irrelevant and incorrect picture of how the U.S. economy should perform over the last five years?

8:10Well, those kind of adjustments are so prone to chicanery into making the figures say what you want them to say that it's something I don't think is much worth looking at those statistics that tell my story. I mean, is that simply political chicanery? Well, yeah, it certainly invites it and it's hard to establish that they've got just the right to tell me price. And that's institutionalized now, isn't it, in the calculation of the CPI? Well, in a lot of it, in imputing the value of goods that are traded and so on. I want to add one thing about the moral hazard. Go ahead. Yeah, there's now a number, there's sort of a small literature now, there's articles in the political science journals that have titles like The four-year presidential business cycle So the political scientists, at least, have figured out the way in which there's an attempt to actually fine-tune fiscal policy to presidential elections.

9:17Of course, the general public is even beginning to catch on to this, that the president gets in and if the economy is, quote-unquote, sluggish, then he'll have Alan do something with the money supply Roger, in your presentation you tie the unemployment rate with the concept of sustainable gold. Are there other measures in the economy that would track out similarly and why do you pick the unemployment rate? Well, using the unemployment rate, I think it shows pretty vividly the unsustainable period of growth.

10:03But you can also look at long-term capital investments. I mean, in the article that I handed out, one point we make is that that particular unsustainable boom was certainly characterized by long-term investment. There's an investment boom and an investment bust and all sorts of businesses who are operating on a current negative cash flow but hope for profits in the next decade or whatever were the ones that went down like the dot coms for instance, a lot of the dot coms were jump started and up and running with negative cash flows and not even anticipating to turn profits for 10 or 12 years and that's a very kind of activity that you could track to verify the Austrian theory and that's what we saw in that period.

10:58What are you doing to work on trying to actually trace where these monetary injections go and how they go? It's very difficult doing it on an industry-by-industry or a sector-by-sector basis, but essentially you want to just watch what's happening to interest rates, That's going to cover what kinds of investment gets undertaken in whichever industry has to be undertaken. Well, Dr. Graves, one point you didn't raise about green finance is bailouts. First there was Mexico, then there's Asia, and there's a long series of interventions in the stock market. and then after September 11th, considering the relationship between political chicanery and intellectual error, how do you account for this aspect of Greenspan's rule?

11:53That's difficult and a lot of the things he did were very much counter to the whole operation of the Fed or what it's supposed to do. He was violating even Fed procedures and taking public stands and using the Federal Reserve to help long-term banking with funds and that sort of thing. And I think it's, you know, Greenspan himself, in response to some of Woodward's questioning, likened it to a fire truck going their own way down a one-way street to put out a waiting fire. Okay, we're not supposed to do it, but hey, you know, to find a worse evil, we'll commit this one. Any more questions?

12:43Right there in the middle. Great, that's Dr. Garrison. When you're looking for a definition of malinvestment, is there any reason why it just can't be simply defined as a project whose internal rate of return doesn't return to the rate of average cost of capital? No, it's not quite as simple as that. Now that might help, I mean in some cases you might identify some, but with the Austrian theory, what's very critical is that investment projects, as used by Hayek, that term is used by Hayek or Mises or whatever, We refer to projects that are seen through several different stages of production and are in the hands of different firms, where outputs of one firm sell as inputs into the next firm.

13:33So there's some vertical relationship between the different firms that eventually give rise to consumer goods. And so the internal rate of return that you would have to look at, if you could look at it, would be the rate of return that would apply to the entire project of several firms. And those are figures that aren't available, they're not calculated by the individual firms. In fact, they're not within the scope of individual firms to calculate. This is one of the problems, that if some industry had a way of making those calculations from the outset, they probably wouldn't engage in those activities. They wouldn't, would they not? Because they're looking at a false... Right. The calculations they're making are based on wrong signals. I mean, prices really are signals.

14:22And if the signals are distorted, the calculations are going to be wrong. And despite the whole so-called rational expectations revolution, we can't simply assume that just because a firm knows or suspects that a signal is wrong, that he knows what the undistorted signal would be. is that information is available but it may well be that the rate of return, internal rate of return that's unique to a specific firm is engaged in part of the project may show it profitable based on prices that they're facing and yet it may be in the end that this project after it's been sold is output, it's input to the next firm, so in the end the whole thing I don't think I'll deviate from what Joseph Salerno said.

15:41says, I won't put numbers on it, but the price of the recession may well bottom out in mid-year of 2002. I won't put any figures on it. So what else might one say? What do you think? I don't know. I'm just a historian. I try to avoid this kind of prediction. Did you see things happening with this administration and this Congress that we've already tried and we've done before in the past in similar crashes or panics that would lead one to sort of make a guess as to what we have to look forward to in the future?

16:35in the next three to four years. Are we making mistakes that we've made before? Well, sure. No, they're infinitely replicable or repeatable. They can always make the same mistake again up until some point. I guess the approach is a total collapse of the system or a hyperinflation or something. They can't apparently do this over and over without learning a great deal. That's not a very optimistic answer, I suppose, Well, actually, I'm referring more to Congress and policy, not necessarily the Fed. Well, no, I was including, I think I was including Congress. But, I mean, Congress has to vote these bailouts, and the bailouts are going... I mean, there's no real chest of money hidden away in the back of the White House to finance the bailouts.

17:24I mean, they're going to bail out the insurance industry, they're going to bail out everybody who even knew anybody Anybody who was involved in the Twin Towers, it's becoming very large, it's huge, and then there is the cost of this war or whatever, it's being called lately, there's all that, there's this whole, but they love that, you know, that you can always sell a military action, and particularly in a situation like this one, there's been an actual terrorist attack, so there's this, I'm frankly wondering how they're going to actually be able to exert any of their famous control with the amount of money they're proposing to lay out in all these areas, but perhaps they have acquired some general feeling for how to keep the thing from becoming just a runaway situation.

18:26I don't know, I mean, not only do you have just normal political motivations for pursuing the same bad policies again, now you've also got this added dimension of bailout, world empire, there were some responsibilities of being the last remaining superpowers. It seems to me it's quite colossal in these proposals, we're going to bail out all these other failing economies. There's bound to be some prize. I don't know how high it will be. I mean, for the American people, for the American economy, that's something I wish I knew. But I don't know if that directly answered your question.

19:12But it seems to me, yeah, H. L. Mencken once said, no one ever went broke underestimating the intelligence of the American voter. But I would say, well, nobody ever went broke underestimating the rascality of these people in power. I don't know, there's very few restraints on them other than the danger of possibly not being re-elected. And it takes a lot to not be re-elected now.