As the Bubble Bursts

0:00Mark Thornton from the Ludwig von Mises Institute. I think it's pretty much neck and neck. Was it you or Robert Blumen that called the housing bubble first? He beat you by a nose, right? I think so. There were actually four or five Austrians very early on. Frank Shostak, Chris Meyer, Robert Blumen, myself. We were all talking about and writing about the housing bubble. And everybody else thought we were crazy. Everybody else was talking about how you couldn't lose money in real estate, how housing prices never go down, and, you know, of course, people were flipping houses and all that stuff. And you know, Scott, some of that's coming back. I know. Well, I saw on TV the other day, they said in Las Vegas, in Phoenix, and one other city.

0:51Orlando. That wasn't the one I saw, but anyway, and on TV is CNBC, they were talking about it and saying, well look, the economy is recovering, it's great. Not exactly, Scott. What we have is a very tight housing market because so many houses are locked up in a legal process of foreclosure and bankruptcy, so they're not really on the market, the banks haven't put them on the market yet. and of course we also have rock-bottom interest rates in the economy and one of the things that's going on is that large corporations and hedge funds are borrowing a lot of this money from the Federal Reserve through the banking system and they're going around and buying up you know hundreds and thousands of of houses and apartment complexes because it represents a cash flow issue, so that these companies can generate some cash flow, which is so much needed nowadays because again of the low interest rates, the result of central banking, Federal Reserve policy, where nobody can make any money on their retirement accounts.

2:05And so, you know, as a consequence, the housing bubble has been reignited. Yeah, well, so it's a good time to get into housing. I knew a guy who owned a skate park construction business and all through the Greenspan years, this is really the greatest legacy, unintended, wonderful consequence to me of the Greenspan years to a lot of people, giant concrete skate parks all across the country, especially in the West from all the excess property tax revenue coming in during the housing bubble. I knew a guy who he was owning a skate park construction business, totally hip to Ludwig by Ludwig von Mises, and told me the story about how he would just read the Wall Street Journal every morning, and as soon as he saw that they raised the federal funds rate a quarter of a point, he knew his Rothbard, he said, oh, they're going to try to let the air out slowly, but that never works, it's going to pop. He sold his business, sold all

2:58his heavy equipment and everything, took his giant profits and went home and watched the whole thing crash. Oh, I know it. You know, there's some smart cookies out there. I got a call in 2006 from from a home construction guy and he wanted to come over and meet me at the Mises Institute. He was from around the area and he told me that he had sold off all of his homes, sold his company at a great price and all of his equipment and he was taking all that money and he invested it in gold and he was heading to Florida and he was going to build him and his family this big complex of houses and so forth and a farm. And I thought to myself, jeez, can I go with you? Right. Because this guy was really in tune with where markets were going.

3:46He had read my article and he was a regular reader of Mises.org, M-I-S-E-S dot O-R-G, in our daily articles and audio and videos and all that kind of stuff. So he was well read in Austrian economics and he made a lot of money in housing, he Well now, here's the thing, you know me as an economist, I'm a great anti-war guy, I don't know nothing about all this stuff, Human Action and this and that, that's you guys' expertise, but here's the thing, I've been good on the housing bubble since the year 2000, and that's just because I listened to Ron Paul. And Ron Paul, and I don't even remember which speech it was, how I knew this or whatever, but I remember telling my friends in the year 2000, and I was right, but too far ahead of my time.

4:35I told them, no, it's a housing bubble. Don't buy a house now. You wait till the prices crash, but before they raise the interest rates and get a cheap house and lock in a low rate, you know? But if you buy a house now, then eventually it's going to owe more on it than it's worth and whatever. But of course, they had years and years and years before it fell and I don't know whether they broke even or not. or not. But anyway, I knew that it was a big fake housing market just like a big fake dot com market because I was paying attention to Dr. Paul's speeches on the house floor. Yeah, everybody should pay attention to Dr. Ron Paul. He's an Austrian economist though, of course, as well as a medical doctor. But you're absolutely right. 2000 was the only recessionary year, as far as I can see back through history, where the housing sector did not take a hit, where there was no decline in the number of housing starts.

5:27The number of housing starts just continued on. And so that was the first signal, really, that we were in some kind of bubble trouble. And of course, it continued to build over the next six years. And so you might have been able to get in and get out, but you're taking your chances. Basically, if you're really not going to be a homeowner, then there's no need to take Well, but they are, I mean, hey, when I tell my story, I'm, I may be way over simplifying it, but is it not as easy as just read the Wall Street Journal and make sure that they're not raising the funds, right? That when they raise the funds, right, that's when they're officially, they've changed their mind, and they're going to stop shoveling new money into this or that market, right? They're going to try to raise the funds, right?

6:23Why to let the air out slowly, which never works? Well, it's a good indicator, but it's not a guaranteed indicator because, for example, if the Fed raised its interest rate, the federal funds rate, from a quarter of a percent to a half a percent, well, that wouldn't really do much to interest rates because... It would just be an indicator though, or wouldn't it be an indicator of they're going that way, or maybe you shouldn't assume that? Right, they're probably going that way and Scott, right now long-term interest rates on government bonds and on corporate bonds and a lot of other financial securities, those long-term interest rates are rising right now and they're rising at a fairly fast clip.

7:09So that's something that all your listeners need to be attuned to, is that rise in long-term In other words, you're saying the Fed is not raising the interest rates, the private bankers are raising the rates because otherwise they're losing money on inflation. They're doing it on their end. That's right. And of course, it's also foreign central banks, they're big holders of U.S. government debt. And if they decide, hey, we don't want as many U.S. government long-term bonds, which they don't, and we're more interested in adding to our gold holdings, which they are, then that's a big indicator that people are losing confidence in the U.S. dollar, the U.S. government bonds and the U.S. government, and it's runaway spending and borrowing and printing that we're going through.

8:41small correction in the stock market to an all-out route. If all that margin money has to be brought in and stocks have to be redeemed to meet those margin calls, it could be a runaway stock market to the downward side. Man, well, yeah, I guess as artificially high as it is, that's how low it's got to really go, right? Well, there's no bottom in this market. I mean, you look at the Japanese market and how it's been, it's gone from like less than 9,000 to, you know, over 16,000 in less than a year. I mean, that's just not right. That's just totally artificial. They're using paper money inflation to try to rig their markets and try to generate so much optimism and so much of a wealth effect that the real economy gets started.

9:37you know they believe in this Keynesian stimulus approach to the economy and to stock markets and so forth and the Austrians have shown that that just doesn't work and the only thing that does work is when government reduces spending it reduces the amount of resources taken out of the economy it balances its budget it gets on a sound monetary foundations with market determined interest rates and starts cutting regulation of the economy and and cutting interventions into the economy. That's what really jump-starts an economy. And, you know, that's true in the Austrian theory, but it's also true in fact. It's true in history. I mean, it doesn't take a brain surgeon to figure this all out, and they're just going in the wrong direction. We've got all this, you know, tax changes and Obamacare changes and environmental changes, labor market changes, financial market regulation with Dodd-Frank, they're just ladling more and more of this stuff on top of the burden that already existed on our economy.

10:44So until they wake up, until they realize that they're doing the wrong thing, our economy is going to stay in a very stagnant and a very risky environment, basically. All right. Now, real quick, and I know you have to go soon, but you've got this latest piece at mises.org mark is called the rise and fall of the dollar and you're reviewing this book by a man named Ike Green, exorbitant privilege and the point I wanted to focus on here was I think you were seemingly agreeing with his sentiment that you won't really probably have a total crack-up boom and destruction of the dollar so much as people are going to retreat, The dollars are going to retreat into other currencies enough that they just sort of balance out where the dollar will still be a reserve currency, but it won't be the reserve currency.

11:41And at that point, I think the way you paraphrase him putting it, sanity will have to prevail. The central bank in America would have to actually act in a completely insane fashion to really destroy the dollar outright, which he doesn't believe is in the cards. And you seem to think that maybe he was right about that. Am I right about that? Well, you know, central banks around the world have been using the US dollar as their reserve currency. And so we've been able to print up money, send it abroad in exchange for their goods. So we've been living beyond our means for half of a century here in the United States, or at least 40 years since we went off the gold standard. and you know now people are less and less inclined to think of the dollar as the most stable currency to back up their central bank and their own money and so money has been moving to the euro, to the Chinese renminbi, the Indian rupee, the Japanese yen, the Swiss franc and at a slow pace

12:47It's also been moving into gold, and so we're certainly destined to lose our monopoly status as a world reserve currency, but Eikenberg, Eiken Green says that he doesn't see a route of the dollar unless the US continues to have outrageous economic policies, but all I see is that we're continuing with these outrageous monetary and economic policies with our debt, and Monetizing the Debt

13:47in 2014, 2015 or 2016 when credit rating agencies re-evaluates the credit worthiness of the U.S. government and he says if we get our ratings cut, then that's going to cause a significant slippage in the dollar and rising prices throughout the economy. So it's something we all need to be concerned with and something that Washington doesn't Washington seemed to be all that concerned with. They're more interested in scandals and inter-party fighting and who's going to be the next presidential candidate, what's going on in North Korea, all of these things when the most important thing in our economy and any economy is the having stable money. That's the key economic ingredient and that's what we all have to hope that Washington realizes.

14:40And then also I just wanted to point at this one thing because I think it's really important especially for a liberal leaning audience which I sort of kind of have due to all the anti-war stuff you know and it's this piece by Thomas D Lorenzo at Mises.org today that you tweeted. By the way follow Mark Thornton on Twitter at Dr. Mark Thornton. It's called the Freedmanite Corruption of Capitalism and I think it's really important that people And you'll see that real libertarians are 100%, 100 million percent opposed to crony capitalism, to conservatism. That is not what real capitalism is about. And if you read Di Lorenzo, who I think you would identify him as kind of a right-leaning guy in a personal sort of a cultural sort of a way, boy, you can see the contempt that he has for conservative economics, which is just welfare for rich people at the expense of everyone else basically, he really cuts right to the core of it here, attacking Milton Friedman and Chicago School.

15:42Right on the money Scott, he's been attacking these phony free marketers for years and I think your audience would be well served to go to mises.org and take a look at that article and how he skewers Milton Friedman as being responsible for creating a vast network of croty capitalism here in the United States. Yep. All right. With that, I know you've got to go. Thank you so much for your time, Mark. I really appreciate it. Thank you, Scott. Thanks again for doing the show. All right, everybody. That is Mark Thornton from the Ludwig von Mises Institute. He's the master of the business cycle.