Current Market Conditions: 6 Jan. 2009

0:00I have with me Frank Szostak, who is a man financial and has been a frequent commentator at Mises Org, a great analyst of all current financial goings on and monetary economics. He has an article up today. And Frank, you're discussing the role of deflation and inflation. What is your, tell us a little bit about your article that we have running today. Oh yeah, well, you know, my basically main point is that Bernanke and the Treasury are causing a destruction of the economy, in fact, those policies are not going to promote employment and wealth, they're basically going to promote disaster if they were to continue on such a massive scale.

0:56For instance, we are hearing that President-elect Obama wants to run a deficit now of $1 trillion, and we also hear that most economists, most experts are saying fiscal stimulus that even Obama suggests is not sufficient, all the trillions that he's going to spend. Bernanke, for instance, has been pumping money on a massive scale for several months now. The Federal Reserve balance sheet has been growing at a pace of 153% year-on-year in December, against 140 in the previous month. Just an illustration, the size of the balance sheet of the Fed is now over $2.3 trillion, Well, the same month, year ago, December last year, it was less than a trillion, 0.8 trillion.

1:57So we got a serious problem here, that those guys are pumping as if there's no tomorrow and they're promising to do it, to do even more. So this is really very bad in terms of what may happen to the wealth creation and to the American economy. I believe if something radical must be done, like Congress must step in and stop this madness, otherwise the American economy could be destroyed. Do you at all see it possible that once economic growth begins to pick back up again, if indeed it does, that the Fed will withdraw the new money, withdraw reserves from the banking system to prevent hyperinflation? Well, I mean, I think it will be already too late, because it's not possible just like that to put money in and then to take money out without producing side effects, although we do observe now that most of the pumping, and that's likely for us, ends up in the banking system, doesn't go out, and banks, commercial banks, banks as such, sitting on a massive

3:34now. But sooner or later, that's what the bank is in the business of lending. In one of the days of that lending, today, potential ammunition to amplify this massive amount of money into unlimited amount of money further. In other words, they're sitting on a massive base which could be amplified to further trillions of dollars and that's really a potential disaster that we can end up. Isn't it a little bit strange that in a sense we would be best off if the economic growth did not pick up any time soon because it will still be living amidst this deflationary pressure.

4:21Isn't that a little bit perverse in some way, because we all hope to see the economy start back up on a growth path? Well, I mean, we all would like the economy to grow, but what the mainstream economics consider as growth is just GDP. What I would like to see is real economic growth, wealth formation and increase in living standards. The so-called deflation that they're all trying to fight is a disaster of focus. The mainstream economics, including Bernanke, including all the experts, are just focusing on symptoms rather than identifying causes for what is happening.

5:10For instance, for Benanke and Mishkin and other guys that only a few days ago there was a big conference in San Francisco, they're always saying that the current crisis is of a mysterious nature. They basically don't really know what caused this crisis, or at least they pretended they don't know. But we, the Austrians, know exactly what caused the crisis in the central bank's policies. And so, rather than addressing this particular issue, they're basically focusing on symptoms that try to fix unemployment, try to fix all sorts of symptoms. In the process, they're basically destroying the underlying wealth formation. If there should be any focus by the government, which I wouldn't like them to focus on anything, but let's say if there should be any focus, the focus should be on how to create as much This by implication would imply that they should withdraw completely from the economy and allow the private sector to do the thing.

6:15Then the issue of unemployment won't be an issue because the private sector wants it to start to create wealth, we'll need all the people around, everybody will be employed. So the whole issue of unemployment is just nonsense. But what they're trying to do is to create fictitious employment, they'll dig holes in the ground and employ people. Nobody needs those holes in the ground. And that's really the disaster. Waste money and employ people. So what does it mean? They'll take from the wealth producers and squander the resources on useless projects. And actually what we are heading now is the repetition of Mr. Roosevelt program, which was a disaster. Everybody hails of course, but we also know this was a disaster. And given the current situation, we could end up in decades of a terrible situation unless the Congress will act fast, unless there's something still left in the kitty and the poor people still there without the savings, there's very little savings left, given the fact that they have not zeroed, who in their right mind

7:25would like even to save right now? What are your money supply indicators telling you right now in terms of how money expansion is responding to the bank reserves? First of all, I mentioned the Federal Reserve pumping is over 152% year-on-year in December. My money supply, AMS, is currently growing at the pace of over 12% in December against 10.4 in November and 2.4 in December last year. Okay, but that's very serious. That's very serious inflation. This is potentially could be very serious inflation, yes.

8:11When do you suppose? Sometime in the future, sometime in the future. What does it mean one time? Are you looking at 12 to 18 month lag here? Well, I would say, if the economy will remain dead, it could last more than a year or whatever, but if for some reason we'll start to see some revival, so-called revival in valid commerce, then you can be rest assured that price inflation will start accelerating because there's so much money around. and that's why the stock market is picking up this whole thing and starting to revive. Yeah and with it's going to come this inflationary price problem and how serious a problem is it going to be? I mean you have some sense of historical rates of money expansion relative to the price response. I mean what are we really looking at here? I mean in a worst case scenario, I mean, are we talking about Weimar or are we talking about 1979?

9:13Well, put it this way, if the pool of serving is bad, in a bad shape, then we will be in a terrible stagnation for a long time, and obviously all the monetary pumping will not enter the economy as such on a big scale, and then prices will not go up strongly, right? If we were to have, let's say, a revival, a recovery, let's say, a so-called recovery, then we could end up in a runaway inflation, you know, and I wouldn't say this is just a wire mark, but I would say that in a couple of years' time, all the pumping could start having a bad effect. By runaway inflation, you mean inflation that's not directly connected to money expansion as such in a quantitative way, but something that's being driven by expectations, right?

10:12Well, that's right. And coupled, of course, with expectation by itself will not cause it unless you have the foundation for it, which is printing presses, and printing presses are there on a massive scale. What realistically can be done legislatively and right now to forestall the problem of a hyperinflation down the line? Well, I mean, if we talk about hyperinflation sometime in the future, a long time future, Let's say what should be done is to stop, is to legislate that fiat should stop printing money, they should not expand their assets, they should not be allowed to buy anything, they should stop printing money period and that's what they're doing right now and that's really all I would suggest and whatever was pumped, I mean if one could do it right now Frank, you don't believe that the managers of the Federal Reserve are completely ignorant of this, right?

11:36I mean, they're not stupid. They understand as well as anybody the relationship between money expansion and prices, right? I would like to believe so, but it looks like to me that they behave like ignorant people because why Austrians understand that printing money is bad news, why even some of the Chicago people understand that printing money is bad news. Those guys, Bernanke, supposed to understand, but somehow I believe that when things are falling because of whatever reasons, and we believe the reason is the Fed itself, they They need to pump money and to revive things and how in the world a factor which causes disaster, printing money which causes disaster can be used to revive the economy, to heal the economy. That should be beyond me. They are basically showing massive ignorance on a massive scale.

12:32What if they just have other priorities? Right now there is the problem of their favorite Investment, banking firms failing, the important questions of stability of the system in general. They deal with the liquidity problems now, they worry about the inflation later. What's wrong with that? Well, what's wrong with that again? Because they don't address the causes as such, but they try to address the symptoms. The reason why the banks are in trouble is because the The wealth creation was damaged badly by policies of Mr. Greenspan and other Fed chairmen, including Bernanke himself, all the monetary pumping, including bad fiscal policies. So the focus should be how to create more wealth, how to strengthen the so-called, in the medical terms, the immune system of the economy, how to make it stronger, not weaker.

13:29and what they're doing in a medical terms, I would say, are weakening the immune system of the economy. You've been looking at markets for most of your life, most of your career. How do you assess the seriousness of the current policy environment relative to what you've seen in the past? Now at press, I basically haven't seen such a madness in terms of monetary pumping by the Fed. I just haven't seen such a thing before. We don't have such a president even. What we observe now is that Fed gone mad because Mr. Bernanke believes that he wants to avoid great depression, and he had this mindset since he became the chairman.

14:20The very small deterioration in the real economic activity is followed by massive pumping. I mean, this guy is crazy, he follows mad policies, mad models, he models some kind of financial accelerator model, which believes that some particular shocks affect lending and there's a set of dynamics which are starting to affect the spills over into the real economy. I mean, it never addresses the issue where the shocks are coming. So his reply to everything is if you have a problem, push more money, push more money. I mean, that's really what he's doing now. As if there's absolutely no downside that we should worry about.

15:07Sorry? And he acts as if there's no downside that we should even worry about. Oh yeah, I mean, he basically, his objective is just to prevent, to counter deflation. I mean, he's paranoid about deflation. So, the moment he observes that prices turn negative, and that's what we had in December, which was for the four consecutive months, he believes that this is terrible, because if prices are falling, it's bad news. And therefore, he has to counter all that. It seems that they are now using the Bank of Japan as the model. That's right. And without realizing that the Bank of Japan model has failed, the Japanese themselves admitted that it didn't work.

15:54Since the early 90s, they were doing all those crazy things and nothing really happened. They still are in a disastrous situation. The luck for Japan was that when they were doing all that, that the rest of the world was still okay, so they could push the export a little bit. But now the whole world is in a mess and all the central banks are adding to the disaster. Well thank you Frank, you have brought us very glad tidings, but I'm always grateful Thank you very much for your insight and your analysis and give us another ring as soon as you see some more response from the money supply.

16:40I think this is something that we need to watch very carefully. This 12% increase in December looks like it could be very worrisome down the line. Yeah, I agree with you. Thank you, Frank. Thanks a lot.

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