Skyscrapers and Business Cycles

0:00Well, this afternoon, our distinguished guest speaker is Dr. Mark Thornton. He's a professor of economics at the Mises Institute. Mark is the author of four books, including a very thought provoking book on the economics of prohibition. Dr. Thornton is also very well known for his seminal works on skyscrapers and Business Cycles, and frequently appears on many mainstream news programs to discuss the thesis. So without further delay, Dr. Mark Thornton, welcome to Finance 550. We're excited to have you here today. Thank you very much. Today we're going to be talking about skyscrapers and business cycles.

0:47Before I actually get into the model and that sort of thing, I want to give you sort of I'm going to give you some of the background to the development of the skyscraper index and the skyscraper model. It's a very unconventional approach in economics. It's a very different, outside the box approach, but yet very successful as well. So I'm going to give you some of the background as to how I came upon it and how it developed in my own life and my own way of thinking. I grew up in the 1970s when the United States economy was suffering from a severe stagflation which was a stagnating economy with high rates of inflation, high rates of unemployment. Nobody seemed to have the right answers and so that was one of the things that I was always looking at in my life around me.

1:41And I came across the Austrian School of Economics. In high school a little bit but in college as well and one of the most important influences I think on my economic thinking was reading Murray Rothbard's book America's Great Depression where Murray explained what was the real cause of the Great Depression of the 1930s and he really reinvented the perspective of the Great Depression and what it was all about. In college I took a special class on Ludwig von Mises' Theory of Money and Credit and that was a special course, independent readings course of Mises' first great book where he really showed what money is and what banking is and how problems and government intervention in banking can cause distortions in the overall economy which can result in a business cycle.

2:42Also during the 1970s, F. A. Hayek, who was a student of Mises, was awarded the Nobel Prize in Economics for his business cycle theory, the Austrian business cycle theory. So that was something that really captivated my attention as far as intellectual interest. And so as I graduated from college, I decided to go to graduate school primarily to study the Austrian Theory, the Business Cycle, because I thought that that would be really the key to solving the problems in the American economy. Things were still very bad and there was really an economic depression in the United States in 1980 through 1982, which was another reason I went to graduate school because there were no jobs basically. But when I got to graduate school, I picked the school that I thought I'd get the most Austrian economics at. When When I got here, I was told by one of my major professors in macroeconomics that the Austrian theory of the business cycle was a grisly embarrassment.

3:48And so I was very much discouraged in pursuing Austrian economics, and I was told that the Austrian school was merely an historical fact, that there were very few Austrians left. They were all teaching at universities that didn't have PhD programs, and so there would

4:37Office, and I got a job at Columbus State College and University, but it was in a position in macroeconomics. There was the position in microeconomics and macroeconomics, so all of a sudden, if I wanted that job, I was going to have to change what my research was all about, and it was at that same time that I came across, very fortunately, Richard Cantillon. Murray Rothbard had sort of turned me on to Richard Cantillon, who was the first economic theorist. And so it was that 1999 period when I was turning towards macroeconomics. I was turning towards the economics of Richard Cantillon. And it's also the time when I first came across an article about the skyscraper index. So as a result of that rather drastic change In my career, I started a series of articles about major economic crises in the United States and around the world. And basically what I was looking at is who saw these things coming and who was more or less oblivious to the looming economic crises in the economy.

5:58The first was, of course, America's Great Depression. And what I found was that Ludwig Ludwig von Mises had written a book in 1928, The Cause of the Economic Crisis, where he basically laid out a whole theory as to why the type of system that we had which was controlled by a central bank and a central bank who was operating monetary policy based on looking Working at the price level in the economy, trying to keep the value of the dollar stable. And so he saw that as the cause. Irving Fisher, who was the great American economist and basically who created macroeconomics, was the inventor of monetary policies run by a central bank guided by the price index. And he thought that if we could keep the value of dollars Stable in terms of purchasing power, then we wouldn't have anything to worry about.

6:59And so while Mises was calling and warning of an economic crisis on the eve of the Great Depression, Irving Fisher was telling us that we had reached a new era of perpetual prosperity. I saw the same thing when I looked into the great stagflation of the 1970s. The Keynesian economist Arthur Oaken, who was the chairman of the President's Council of Economic Advisers, wrote a book that was published the same month the economic crisis of the 1970s started, where he said that the business cycle was a thing of the past and that Keynesian approaches to managing the economy would prevent any type of economic collapse.

7:44It was at the same time that Murray Rothbard published his small pamphlet on what causes business cycles where he was reiterating what he had written in his book, America's Great Depression, and reiterating what he had learned from Ludwig von Mises, who was his teacher. I saw the same thing with the Japanese bubble of 1990. The mainstream economists were saying that the Japanese system was the way to go. The Nikkei stock index had reached 36,000. It looked to mainstream economists that Japan was going to take over the world by dominating in the Economy. And then there was the technology bubble of the late 1990s and, of course, the meltdown in the NASDAQ stock market beginning in the year 2000.

8:38And here we have a case where we have a lot more economists involved in the picture. We had several Austrian economists warning throughout 1999 that we were in a bubble, It was going to crash and that there would be, you know, significant consequences as a result of that. At the same time, of course, mainstream economists were saying no, we were in a new era, Alan Greenspan was in charge, we didn't have anything to worry about, books were appearing from mainstream economists, the Dow Jones was over 10,000, but the first The first book predicted that the Dow Jones would go to $36,000 and then a couple of months later a book came out that said no, the Dow Jones was going to go to $60,000 and just before the crash took place an economist named Ralph Acampura came out with a book called Dow 100,000 and so it again is a case of Austrian economists knowing exactly what was going on, knowing exactly what the cause was, of course you don't

9:46the timing and the magnitude, but they knew of what was coming and the mainstream economists were completely oblivious. They thought that they had learned how to control the economy and create perpetual high rates of prosperity. And then the housing bubble, of course, that were going through the crisis phase of the housing bubble, Austrians started writing about the housing bubble as early as 2003. I began writing about it in 2004, 2005, 2006, and basically explaining what was the cause, which was artificially low interest rates by the Fed, a misallocation of resources, malinvestments, while the mainstream economists The Fed is managing policy just perfectly. We have low rates of inflation. Everything is great.

10:47Ben Bernanke was telling us that mortgage lending standards were the best that they had ever been. And the Fed was telling us that all these asset-backed securities, derivatives, collateralized debt obligations, The New Era Phenomenon I'm sure some of you heard this where you were told that housing prices never go down, that nobody ever loses money in housing, and where people without any experience at all were flipping houses and making money.

11:46It's just those kind of things that are symptomatic of significant boom bust cycles in the American economy. I mentioned Cantillon earlier. He's going to be important to the overall study of skyscrapers and why they are so useful at helping us predict significant economic crises. Richard Cantillon was a banker and a very clever banker. He was on the staff of the Mississippi Company during the Mississippi bubble of 1720 and the shares in this company increased by you know several thousand percent during the bubble and Cantillon was famous for not just making money during that bubble but he also sold his shares near the top and shorted the shares and also invested in such a way as to take advantage of the looming change in currency exchange rates and so he made really three large fortunes during this time and was able to write a book following this which laid out systematically an economic theory of how The Market Economy worked and he was really the teacher of all the famous, early famous

13:19economists. He was referenced by Adam Smith, David Hume read his manuscript, Jean-Baptiste Say, Turgot, Kondiak, all the famous early economists basically got their economics from this guy. He was rich, he was smart, and it's always, I think, a good idea to intensely study people who know what they're doing, are creative intellectually, and also use that knowledge to make money and to understand how the economy works. So I was reading Cantillon. And then I took a sabbatical in the year 2003, and I was only teaching one course, and it was at that point that I decided that I was going to work on this skyscraper thing, linking it with Cantillon.

14:18When I first saw the skyscraper index in the business press, most of the stories basically just regarded the success of the index and linked it with things like the January effect and the Christmas rallies and the use of the winner of the Super Bowl to determine if the market was going to go up or down. In other words, they regarded the skyscraper index as just a mere coincidence and not really valuable for telling us much about the economy. And I saw it differently because I had been reading Cantillon and I realized that there was an economic connection with these skyscrapers because, of course, business cycles are all about real estate and construction and things of that nature as well as interest rates and that's what Cantillon was writing about as well.

15:18The article, Skyscrapers and Business Cycles, was published in the spring of 2005. It took about two years, which is not uncommon, to actually get it into print and it's published in the quarterly journal of Austrian Economics and I guess most of you have a copy of that. Now in late 2007 a crisis signal was given by that model and basically the model says says that whenever a new record is set in terms of the height of skyscrapers, that that is a signal of a looming economic crisis. And so basically it gave a signal at that time that there was a global economic crisis coming. Three months later the crisis began. One of One of the first signs was that the mortgage originator started going out of business.

16:17About six months later, the Fed started unleashing its monetary weapons of mass stimulation. About January of 2008, one new unprecedented type of intervention after another and of and of course of massive amounts that were at one time unbelievable. So this model of skyscrapers and business cycles, first of all the paper shows that there is a coincidence between new record-setting skyscrapers and global economic crises. In the coincidence that originally appeared, I did more historical research to show that Some of the exceptions that occurred in terms of there not being a crisis associated with a new record was actually misplaced.

17:15So these new record-setting skyscrapers are started during a boom. And usually the boom is of a significant length and a significant depth in terms of the stock market, the economy, jobs and so forth. There's a long period of high economic growth and that's when these record-setting skyscrapers are first started. The records are actually set in terms of the height of these buildings near the top in the boom phase of the business cycle, the crisis sets in, the bust occurs in the economy And that's about the time that these record setting skyscrapers are completed and opened to the public.

18:06Now what I basically propose is that the Austrian theory, the business cycle, explains both business cycles and these record setting skyscrapers. And the simple recipe here is that the Fed creates conditions of easy credit, so they're increasing the money supply to banks, banks are making more loans, the interest rates are artificially low and credit standards are diminished. If the Fed creates more credit then you basically have to reduce your credit standards in order to inject all that new credit into the market. You have to have less reliable borrowers essentially. And this is This is where the cluster of errors takes place.

18:59That's one of the unique things about the business cycle is all of a sudden all entrepreneurs are all making mistakes at the same time. They're making male investments. So the economy goes into a boom as all of this construction activity takes place. And then the errors are only revealed as being unprofitable and stupid during the bust. Now connecting the Austrian theory to the skyscraper index is what I did was I used what are called Cantillon effects. And Cantillon showed that when there's a change in the supply or flow of money in the economy, And it changes the structure of production. So there's an artificial source of new money that comes into the economy, an artificial source of credit that comes into the economy, and this causes entrepreneurs to change the structure of production. And this is what ultimately creates a connection between the skyscraper records and the Austrian theory.

20:11Now let's go through the coincidence of record-setting skyscrapers with the business cycle, and this is laid out in the paper in both table form and there's also a diagram. The first is the Panic of 1907, and with this panic, which was significant because this is what really set the groundwork for establishing the Fed, the Singer Building was started Before the Panic, the Metropolitan Life Building was started before the panic. Singer was completed in 1908. Metropolitan Life was completed in 1909. The Singer Building set the record. The Metropolitan Life Building exceeded that record.

21:01The next new record was the Woolworth Building, also built in New York to a height of 792 792 feet 57 stories and that was associated with no real economic crisis and so that was considered an exception but when I went back and looked at the historical record the economy at the time was in very severe straits. The economy was clearly in a recession and it had experienced one of the worst quarterly Declines in almost a half a century. And what happened about a year into this crisis was, of course, you had the establishment of the Fed in 1913.

21:49They began to inject large amounts of money into the economy. And then you also had the beginning of World War I, where basically the entire European continent was at war and they started demanding commodities and food from the United States And that helped restart, both of those factors helped restart the economy, which otherwise would have probably gone into a severe economic crisis. And historians would have called it something, but because of those intervening factors, there was no huge economic crisis associated with that. And then we fast forward to the Great Depression, when 40 Wall Street was completed in 1929 927 feet. That's now known, I think, as the Trump Building. The Chrysler Building was completed in 1930 at 77 stories and over a thousand feet. And then finally we had the New York State, the Empire State Building completed in 1931 with 102 stories and with over 1200 feet in height. And of course, all of those were signaled in and began before the Great Depression and are historically associated with the beginning of the Great

23:11Depression. And then there's a lull. Of course, the Great Depression lasted a long time, including World War II. And what we see is a boom in the economy in the 1960s. It was called the and Go-Go 60s at that point. We had the beginnings of the World Trade Towers in New York and the Sears Building in Chicago all expected to exceed 100 stories at the end of the 1960s. The World Trade Towers were completed in 72 and 73 and the Sears Tower broke their record in 1974. and, of course, these buildings signaled in the great stagflation of the 1970s, basically when we had high rates of unemployment, we had high rates of inflation, several recessions, and the stock market never recovered its real inflation-adjusted value from 1969 until the In the mid-80s, because we were getting lower stock prices and higher rates of inflation, so the real value of stocks had fallen a very long way.

24:32And again, we fast-forward to 1997, the completion of the Patronus Towers in Guadalampur. This set the record in terms of height, in terms of feet, at 1483 feet, and that signaled Taipei 101 was built in Taipei, China. It was completed in 2001. It set the record and it signaled in the bubble in tech stocks in the meltdown in the Nasdaq stock market.

25:24And then finally and more recently, we have the Burj Dubai Tower in Dubai, United Arab Emirates in the Middle East. The signal for that, they set the record in the second half of 2007 and it was recently opened to the public January of 2010 at 160 stories and over 2,700 feet and, of course, the Burj Dubai Tower was a signal about the housing bubble and its ultimate collapse. So the record there is quite impressive. I've also gone back in time and looked at other previous 19th century records and they were also associated with economic panics and economic crisis in the United States.

26:29Some exceptions, so we have the earlier records in the 19th century also confirmed, the skyscraper index and we've also looked at state level and individual country level records in places like South America and in various states around the United States and the record there is also good in terms of new records within those states and within those countries being associated with Recessions in the Local Economies or in the Economies of Other Countries. Other crises in the United States include the Depression of 1920-21, the Depression of 1937-38, and what I would consider a Depression of 1980-1982.

27:17But these were all less severe crises. They all occurred in ongoing recessions. In other words, in 1920, we were still suffering the aftermath of World War I. In 1937-38, we were still within the context of the Great Depression. And in 1980-1982, we had been suffering through economic malaise for more for more than a decade. So the components of the model of skyscrapers include the following things. First we have a period of easy money, easy credit, an economic expansion and a boom in the stock market.

28:04Then we see capital expenditures increasing and money flowing towards new technologies and New Industries, and the transformation via technology of existing industries. This is sometimes referred to as a new era, but in my context it's really the building of Kantian effects or changing the structure of production on an artificial basis. You also get highly speculative investments and luxury spending. This is the period when the skyscrapers of record-setting heights are started, but inevitably inconsistencies and tensions in resource uses develop in this artificially distorted economy and this creates some bad news and makes markets begin to turn sour essentially.

28:59Losses are announced by various companies, unemployment picks up and bankruptcies start to Mount. And this is where the skyscrapers are completed and open to the public and open for use. The skyscraper of the 20th century, if you really look at it, has replaced things like railroads and the factories of earlier periods as sort of the symbol of the economy, of the capitalistic economy. Just as global commerce, service industries and information industries have replaced Agriculture and Heavy Manufacturing Industries in the United States or as the leading features of the current capitalist economy.

29:48So Cantillon, Cantillon effects are really about relative prices, a distortion of relative Let me give you a couple of examples to take down in your notes. Say for example in Seattle, Washington where they grow apples, a good high quality apple cost one dollar, whereas a medium quality, medium quality apple cost about 50 cents. That means in terms of relative prices, one medium apple, excuse me, two medium apples are the equivalent of one high quality apple. So if you choose a high quality apple in Seattle, you're foregoing two medium quality apples. And then to that scenario, add a 50 cent per apple transportation charge to move those apples from Seattle down here to Alabama.

30:48Well, what do you get in Alabama, then, is that the higher quality apple now costs $1.50 and the medium quality apple costs $1.00. So that the high quality apple, it means you have to forgo one and a half of the medium quality apples. The result of that transportation charge is an alteration in relative prices and it means is that the relative price of high quality apples in Alabama is lower than the same apple in Seattle and this explains why the high quality apples tend to be exported out of the state of Washington to other places around the country.

31:37It also explains why your lobsters up there in the northeast, why the very best lobsters Lobsters tend to be exported. If you're going to export lobsters from the Northeast to a place like Santa Fe, New Mexico, there's a heavy transportation charge. And the consequence is that only the very best lobsters of the prime age and prime size with the most tender meat are going to be transported out to these faraway places. And why a lot of the medium The same and lower quality lobsters remain in the local economy. Of course, I'm sure they're better prepared up there, but as far as the raw materials, the export industries usually get the very best.

32:30And this is another theme in my own research that I've used to tremendous effect. The changes in relative prices that are caused by risk and transportation charge, I've used that to explain why the potency of marijuana that's imported into the country has increased significantly over time. I was also able to use that same effect to explain why the blockade runners during the Civil War would import things like ladies' dresses rather than guns or food stocks and things like that. It's because there's a change in relative prices that gives an incentive to import the higher-quality, the higher-priced items.

33:21Okay, in context of the business cycle, what we see is changes in the interest rate caused by the Fed really are going to tip the balance or the relative prices between consumption goods and investment goods or capital goods and when the interest rates are reduced that favors the investment goods or the capital goods relative to consumption goods and in terms of the skyscrapers and the business cycle there There are three different Cantillon effects that I want to discuss where the interest rate causes a change in the structure of production in the economy and we can sort of witness these changes and how they impact and create an incentive to build record-setting skyscrapers.

34:21Okay, so we have three Kantian effects, all caused by changes in interest rates, and they're all reinforcing. In other words, if the interest rate goes down, they all have, the effect all goes in the same direction. If the interest rate goes up, it's going to discourage things like building large structures, certainly record-setting structures. Okay, the first Kantian effect is on the price of land. Reduced interest rates increase the price of land, particularly, of course, with real estate there's three factors, location, location, location, and so the prime locations are going to see the biggest effect. During the Japanese bubble it was said that one city block in downtown Tokyo was worth more than the entire GDP of the state of California. So it gives This gives you some idea of how distorted land prices can become, particularly in major cities in their central business district.

35:29So you reduce the interest rate, it increases the price of land, more so in the central business district than agriculture land. And this creates an incentive to build higher structures. You build higher structures with more floors so that you can spread out the cost of that land over more feet of rentable space. And so this is typical, whether you're in a business cycle or not, but the higher priced land you tend to see the highest structures. And as you move further away from the central business district and the price of land falls, The second Cantillon Effect relates to the organization of industry. As you reduce interest rates and you reduce the cost of capital, that creates an incentive to create bigger firms, more capital intensive firms, and to try to take advantage of economies of scale.

36:39In the Austrian circles we refer to it as a more roundabout production process. In the paper I give an example of the dairy industry, where the dairy industry goes from local production to regional production distribution, basically where 50 years ago every small town Now would have several dairy farmers in the local area. They would produce the milk and process the milk and actually distribute the milk all within the same firm. So you'd have local production, local processing and local distribution. Now what happens as production becomes more roundabout?

37:29So you have all these dairy farmers who produce the milk, but then that milk is brought to central processing plants or regional processing plants for the processing aspect of milk and dairy products. And then this larger company then distributes these products over a wider range of territory. And this is a natural part about the economy, but this is an illustration of what happens This can take place naturally or it can take place artificially in a boom and in the boom I think you probably see it most notably in terms of mergers and acquisitions where companies are growing and becoming more roundabout quickly through the process of mergers and acquisitions is buying up and acquiring firms of a similar nature and so you go from a local type of an industry to a regional to a national type of industry and national types of industries need national headquarters or even global headquarters and those global headquarters are going to be located in major cities and within the business districts and hence this

38:50This increases the pressure of the economic incentives to build bigger buildings. And finally, the third Cantillon effect is on technology. Every record-setting skyscraper requires a whole new set of technologies. You have questions about the foundation of it being able to hold up a larger structure, things like ventilation and heating, cooling, lighting, transporting through elevators and and Stairs, Communication, Electrical Power, Plumbing, Wind Resistance, Structural Integrity for Earthquakes and so forth. All of these questions have to be answered with a new answer, not existing technologies but brand new technologies.

39:38All of these things are harder to do. It's harder to pump water up 40 floors than it is 20 floors.

40:17In the United Arab Emirates, of course it's very hot there, and it says that the air conditioning requirements on a daily basis would be the equivalent of melting, I think it's 20 million tons of ice to keep that building cold. So you've got to have technology. All your input suppliers have to come up with new ways of doing things. They have to set up new factories for building all this new technology and it's got to be more effective technology because remember every tube, every wire that goes from the bottom to the top means that you're reducing the rentable space on the floor and on all of the floors, not just one floor, so that you can't just expand the air conditioning In the case of the Dubai Tower, out of 160 different floors, you've got a whole new technology that comes into play.

41:33These three Cantillon effects show how you're altering the structure of production and of Of course, you're creating these things in unique capital goods that can't easily be transformed into other uses. The technology can't be transformed into other uses and the buildings themselves can't be transferred into other uses. Now, all three of these results that I've described here today are the result of lower or interest rates, and they're all generally recognized by professionals who do these projects. So if you talk to engineers or architects or construction people, bankers, lenders, they'll all recognize these maybe not as being caused by the Federal Reserve, but they're well aware of the Role of Interest Rates and Technology and a lot of the things that I've discussed here.

42:37Of course, once all these projects are completed, it's very difficult to reorientate the capital that's been involved back to normal conditions. Skyscrapers really can't be used for other things and the builders and the input suppliers have little use for their innovations other than in building other tall skyscrapers. So that means there's a big drop in value across these industries and that's a reflection of what's actually going on in the real economy. So the paper goes on to discuss a lot of the aspects of construction and how they can become out of whack during the business cycles and how normally the constructing buildings is done with very precise formulas, everything is more or less set in stone and you have a good idea of how a building pays off but you see comments in there where during a boom During the new era, all of the rules of making money by building buildings seem to go out the window and people, instead of measuring the value of land and what it should be using

44:08set guidelines, they say, well, you know, it's just a matter of what people are willing to Pay, or Who I Can Sell This Speculative Project To. I don't know if you've seen this in your area, but during the housing bubble here in Auburn, there was a sort of a manic phase where people were building luxury game day condominiums. And the game day condominiums meant that people were buying things, buying luxury condos, So that when they came to Auburn football games, they'd have a place to stay and they'd have a place to park. So you basically are buying a quarter million dollar condominium for six weekends out of the year.

44:57And the big question for me was why were people doing this? How can you possibly get enough value out of that investment to justify six weekends a year living in a place and the general answer I got back is that we can always sell them later on to other people for more money and so that's really the type of thing that's going on during these record-setting skyscrapers. And so what I'm basically going to conclude here is that the Austrians have a theory of business cycles. The other schools of thought like the Keynesians attribute the business cycle to psychology, that we either are hyper speculative or depressed at various times.

45:53Other schools of thought basically say that things just happen, that various unanticipated Shocks just happened to the economy. There's no real explanation. There's no cause. It's just something that happened. And what the Austrians offer is a theory and a theory that involves a cause and effect analysis. We've spotted the problem. We've spotted the cause. We've been able to identify at least the major crises that have gone on in the United States. about the same time, the Keynesian economist and other mainstream economists have not only been oblivious to these looming economic crises, but actually said that no, that we've eliminated the business cycle due to our own good work and that we really don't have to worry about, We've done away with the business cycle and that the new era and the era of perpetual prosperity is here to stay.

47:03With that I've used up a pretty good amount of time so I think I'll stop there and hopefully take some questions. Thank you very much Professor Thornton, that was a fantastic lecture. This is Michael speaking. I'll start by asking sort of a general question. Over the last couple of years, we've seen unprecedented government intervention in the markets. We've seen public debt levels reach unprecedented heights as well. What is the consensus view out of the Austrian School with respect to the general direction of the economy? There's a fabulous binary debate out there right now with two camps, one of which thinks we're headed down the path of countries like Zimbabwe.

47:55The other, more representative of Japan, where they've spent two decades building bridges to nowhere and dropping money out of helicopters and really have nothing to show for it. So we would certainly welcome the opportunity to hear your view and that of the Austrian School. Well, Michael, I would say that Austrian economists, of course, do view everything the Fed and the Treasury has done as unprecedented. And we also, there is a consensus that all of this is the wrong approach to things. And basically, not a scientific survey, but I would say that we're all scared of what Washington D.C. has been doing.

48:50They've been following basically the Japanese model of zero interest rates, of giving credit and loans to companies that are insolvent, are bankrupt, and so all of this unprecedented attempt to rescue the economy is all misguided, it has no chance of working, and it's also are also going to make the consequences of this economic crisis much larger, more severe, and more drawn out.

49:36The Japanese economy was basically taken from one of the best and the most vibrant economy in the world and given this continual Keynesian stimulus, public works, easy credit and it's basically destroyed which was once one of the greatest economies in the world. But there is no real consensus as to whether we're following the deflationary or the inflationary pattern and part of that is the result of the definitions of inflation.

50:22For me, I think we're going to get both depending upon your definition of inflation. I think that as far as inflation of the money supply, I think that the Fed under Bernanke is going to follow an inflationary policy whereby they will be attempting to increase the money supply or at least maintain it where it is. They are inside the Federal Reserve Board in Washington DC. They are deathly afraid of deflation. And so basically they're going The Federal Reserve is going to do anything possible in order to reinflate the economy, which means they're going to overshoot, so that once the banks do start lending, the Fed is going to allow that process to go on for an extended period of time, and of course because of political pressures, even if it wasn't Bernanke's own model, and his own mindset, and his own fear, his own concern, There is concern over his reputation. There is also the additional political pressures in Washington that favor more inflation because they are more concerned with trying to get employment back going.

51:57Now as far as deflation, Austrians are all for that, Bernanke is all fearful of that, but I think what we're getting is deflation of asset prices. And that's what most people, when they talk about deflation, they're not really talking about the old CPI, they're What we would have liked to have seen, or at least what I would have liked to have seen, was what was happening after the skyscraper signal announced a global crisis coming.

52:45What was happening in the economy was what we were hoping in the economy. We were seeing things like the mortgage originators, dealers, whatever, going out of business one right after another. We were seeing a contraction in the housing industry and construction companies cutting back on production and going out of business. A lot of the little guys, at least, sensed that the game was up and were basically leaving town. The stock market started correcting and what was going to happen was that many more of these large New York City commercial banks would have gone out of business, Fannie Mae and Freddie Mae would have gone out of business, and that's what we want.

53:39You know, it would have been terrible in terms of economic conditions, but we want a large part of the derivatives market, for example, to fail. There's a lot of good things about derivatives, but there's a lot of excess, basically, you know, when you get to the casino side of the derivatives market. We wanted that to go out of business. You know, the existence of so many hedge funds, for example, we clearly want a cleaning up of that particular industry and we wanted the government-sponsored enterprises like Fannie Mae and Freddie Mac, we clearly want those and have always wanted those to go out of business and to cease operations because they're an artificial impairment to the allocation of Resources in the Economy, you know, we're not exactly even for home ownership. I mean, the government was pro home ownership. Austrians are neutral with respect to, you know, things like that. Those are normative issues. But as an economist, looking at the modern economy, I'm thinking we don't want more home ownership. We want less home ownership because we want

55:00Our labor has to be more mobile and flexible, especially at the upper end. Your students are hopefully going to be getting jobs where they may have to move several times. They may have to change companies several times. They may have to take assignments, temporary assignments in other places around the country or maybe even other places around the world. So we want a very flexible home market and not necessarily pinning people down in their own home ownership. So there's a lot of things that could have been cleaned up in this contraction, which we call it a correction, because it's the process of correcting that cluster of errors that took place during the boom.

55:55So they've tried to put a stop to that deflationary process, which otherwise would have seen a collapse in these asset prices, would have seen a lot of bankruptcies and foreclosures, drastic reduction in the prices of all those things, which would have increased the purchasing In the 19th century, when there wasn't a lot of ways for the government to intervene, you'd see these very steep and severe contractions in the economy.

56:50and then rapid expansions because the prices of assets would come down, there would be foreclosures and bankruptcies, the assets would change hands at much lower prices and the new entrepreneurs would be putting people back to work. Well, thank you. I will give Fanny and Freddie credit for doing an extraordinary job of destroying value. I don't know if there's destroying shareholder value. I don't know if there's another company out there that has been as successful as them over the last 30 years in destroying shareholder value. I think they probably hold the record. But before I ask Another question, let me open it up and see if there's anyone else that has a question.

57:40I'll go from here. Yes. Again, thank you for taking the time to talk to us Mr. Ford. From your speech I gathered that skyscraper construction is just the tip of the iceberg. So what I don't understand is why you put so much emphasis on it. Would it not be much simpler to say that the causes of skyscraper production, As you said, economic boom and interest rates are a sign of depression rather than the construction of the skyscraper itself, and that boom leads to an impeding economic bust.

58:33of Real Estate

59:03of a massive process in the economy that affects, you know, not just the central city, commercial districts, but places throughout the country. Another thing that the mainstream economist and the Fed economist and the real estate people would say, well, you know, prices are going up in California, prices are going going up in Nevada and Florida, but most of the country prices are only going up at a reasonable rate. But for the Austrians, it's not just the price that matters even. So that if we were to say double the number of houses in the economy this year and the prices didn't and change at all, we would still have made a lot of male investments or bad investments in the economy.

1:00:03We would still have misallocated our resources in the present and constructed them in such a way that they wouldn't provide very much value over the life of the project. So what we're talking about in terms of business cycles is a massive problem. The systemic problem throughout the economy and indeed most of these crises are global in nature so that countries around the world that joined in may have been connected to the U.S. dollar, for example, are very much being affected by this same general process. It's just that knowing the difference between a business cycle and a normal pattern of economic growth is very hard to tell.

1:01:00It's very much an art, it's very much not like a science. We cannot predict things scientifically for sure. We can't even know to the extent of how much influence the Fed is having on artificially distorting the interest rate from what it actually is to what the market would have produced. So we're using a lot of investigative tools, a lot of hunches, a lot of statistics, a lot There's a lot of anecdotal evidence to help us sniff out the difference between a boom and an economic growth, and you see in the later part of the paper, this discussion goes into great detail about all this, but skyscrapers, you know, the fact that we see multiple record-setting

1:02:34You have to, in order to sense out these booms and looming busts, we want to bring everything we can to bear because it's incredibly difficult to be able to see these things coming and we even rely on anecdotal evidence of people day trading stocks without any knowledge of what's going on and they're making money and they're telling their friends to quit their jobs

1:03:34Thank you Professor, any more questions?

1:04:04No, well I'll give you, I'll let, I'll allow everyone to sort of leave on one final thought here. What is, there was a fantastic article about, maybe a week and a half ago, two weeks ago on the business insider, on skyscrapers and the business cycle and Professor Thornton, Well, that's a good question. It's really difficult to get information about the building of these skyscrapers that are currently going on.

1:04:55You know, it doesn't have to be even record-setting skyscrapers. The record-setting skyscrapers, they're very secretive about, they very often put out misleading plans that they're not actually building the record-setting skyscrapers. Right now I think that with the Bourges-Dubai Tower being so high, so much higher than the other skyscrapers, that I don't foresee anybody actually beating that record. There is some indication out of China that the Chinese want to build a record-setting and Skyscraper and that would be very apropos of course because of China's role now in the global economy and a long time ago when the paper was published in 2005 there was supposed to be a record-setting skyscraper in Shanghai that was going to be completed in the year 2012.

1:06:05The latest information I have is that, which again is not all that reliable, is that they're going to have a record-setting skyscraper completed in 2013 in China. Now it doesn't say, I have not been able to confirm, whether that would be a global record or a Chinese record. But the plain fact of the matter is that China is building skyscrapers in a way that is reminiscent of the construction that went on in Dubai before the Burj Tower was completed or in Nevada, in Las Vegas, Nevada where all of the casino and housing construction was going on when they had to change the name of the state bird to the construction crane at the time as a joke.

1:07:12And so China, whether or not they have a world record or a local record, the level of activity over there in terms of construction gives the same appearance of a significant bubble in the works and you know China is also a country that all of the same similar factors have been applied that existed in the past that China's rate of economic growth is spectacular that it's a new era and they certainly have a lot of good fundamental factors going on there in terms of their policy and in terms of their micro policies and the freedom that exists in their economy.

1:08:06So they're free enough now to create a significant economic bubble and their policy to address the economic crisis last year and their stimulus package was considered the most significant around the world in terms of the amount of money that they put to work stimulating public Works Projects. At the same time, they also did the most in terms of monetary expansion. Basically by forcing state banks and encouraging private banks, they doubled the amount of lending in their economy last year over the previous year. At a time when the capacity in the Chinese economy was already far outstripping the demand for that capacity.

1:09:11And so, given that a lot of their customers, who they sell to, like the United States, is in a quagmire, the European economy is in a quagmire and facing about at least a to half a dozen nations with sovereign debt problems, at least as significant as Greece in terms of their size and their magnitude. It seems to me that the Chinese can still have enough authority over their economy that they can make the statistics work, but in In terms of the real aspects of their economy, I expect, or I think we should expect, significant economic troubles in that economy, whether or not there's a skyscraper here at work in terms of setting the record.

1:10:10Well, Professor Zornin, thank you very much for your time. We've very much enjoyed your lecture today and appreciate it. Thank you very much.