Meltdown: An Interview with Tom Woods

0:00Welcome to the first ever Young Americans for Liberty podcast. My name is Aaron Ricks. I'm the president of the Young American High School chapter of the Young Americans for Liberty. Along with me in here is Kyle Peabody and Michael Lee, senior members of the club. Delighted to have as our first guest Mr. Tom Woods. Mr. Woods is a senior fellow at the Ludwig von Mises Institute. Mr. Woods' new book just released a week or two ago, Meltdown, a free market look at why the stock market collapsed, the economy tanked, and the government bailout to make things worse. Now, personally, I really dove into the theory of Austrian economics a little more than a year ago, around the time I started paying attention to the Ron Paul campaign and listening to the Peter Schiff interviews, which, as everyone says, are very amusing. Now, as a high school student, I read their book, or at least most of it, I didn't have time, the time I would have liked to take to go through it.

0:47I'll be the first to admit that advanced economics theory isn't something, you know, isn't something easy to grasp. Now, the first book I read was Henry Hazlitt's Economics in One Lesson. The Theory of Money and Credit

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2:26the Forward by Ron Paul, in which he says exactly that, that I'm pretty sure there's going to be an avalanche of books and they're all going to be a disaster, so I figured I would sort of do one for the good guys, get it out there, make it marginally harder for the media to pretend that the free market interpretation of all this doesn't exist, and the sales of it so far, I mean it's too early to get any hard figures, but I mean It's selling like crazy, so I'm hopeful that it will gum up the works a little bit as they try to claim that this is a big failure of the free market. I wanted the book to counter them, but also to help people who support the free market to make the arguments, to learn what the arguments are so that they can defend themselves. Profile Investment Services, Inc., Ltd., or Israel National News.

3:41The question would have to be, I guess I'd put it this way, part of human nature is that people can be greedy. That's just unavoidable. So the question is, what institutional framework can cope the best with this undeniable aspect of human nature? And it seems to me the free market copes the best with it, because if the free market can cope the best with it, then the free market can cope with it. If you want to improve your material well-being, how do you do that in a genuine free market? In a genuine free market, you do that by doing something that pleases your fellow man. That's how you get his money, legally. That's how you get his money. So that's the institutional framework that in effect helps us best cope with greed.

4:32Whereas a framework that is status, that's dominated by government, is not so helpful because the greedy people just wind up in government and they use government to line their own pockets and loot the rest of the population. Whereas a businessman has to get the voluntary consent of his customer. Nobody in government needs the voluntary consent of anybody. They're the government. They have a monopoly on violence. So when I look at this crisis and people try to tell me it's caused by greed, well of course there are some greedy people, no question about that, but what kind of environment is it in which greed can lead to an outcome like this. And what I want to argue is that explanations that simply refer to greed leave out the institutional factors that allow greed to flourish. And those institutional factors would be, for instance, the unmentionable Federal Reserve system, which pumps, in this case, literally insane amounts of money into the system, thereby lowering interest rates below where the free market would have set them. And this, you

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7:06The Free Market is surprisingly stable, but it becomes unstable when you intervene in it, and that's what the Fed does. The Fed's very existence is a violation of the free market. Definitely. To me it sounded like almost a misnomer, like there's no tangible evidence behind the whole argument that greed causes a financial collapse. Now, one of the things I commend you for is you mentioned panics and crashes even before the Federal Reserve's coming to existence. These crashes still function in the same exact principles that we see in later booms of busts when the Federal Reserve was created. Can you elaborate a bit on these previous panics and crashes? Transcription is a production of the U.S. Department of State.

8:47The Federal Reserve is borrowing this money to go out and create projects that are aimed at future production of goods. So that's good. We're going to consume in the future and they're producing for the future. It's wonderful. But if interest rates come down just because the central bank forces them down, well now we've got a time mismatch because now investors once again will invest in long-term projects aimed at the future, but we haven't necessarily indicated a desire to consume less in the present to fund these investments. In fact, we may even be consuming just as much or more than before. So meanwhile, you've got investors investing for the future, but consumers are demanding more of existing goods right now. You've got investors engaged in product development at a time when Americans want more of existing products right now, so there's a time mismatch.

9:37And secondly, when you and I save more, the fact that we're not consuming as much to finish their investment projects. But when the interest rate comes down, just because it's been artificially forced down, well that doesn't magically produce all the physical goods necessary to finish all the investment projects that businessmen will start. So they're going to find that they cannot afford to finish a lot of these projects. So in other words, when you interfere with interest rates and you don't let the free market set them, Profile Investment Services, Inc., Ltd., or Israel National News.

10:38the same factor, the same events, the same interference with money and interest rates that we see in all other panics, because if you look at the 19th century, you don't have a Fed, but you do in many cases have a government established national bank with government granted monopoly privileges, which you had leading into the panic of 1819, which you had leading into the panic of 1837, and they have a national bank with government granted monopoly privileges. They create more money than the free market would have created and they push interest rates down lower and I quote people, contemporaries from the 19th century, looking at these panics and what they're describing, the phenomena they're describing are exactly what Hayek describes about the business cycle that we see an excess of investment in certain unsustainable lines and then we've seen this bust and everything's come crashing down. It's exactly the same thing and you look at all the other panics, it's either again some national bank that's authorized by the Federal Reserve

11:38or the banking system in general, simply creating money out of thin air, which in effect puts the economy on a kind of sugar high that can't last. It doesn't have a real foundation. It's phony. And so all these panics are all explainable on the same grounds. Well, yeah, I definitely think it's really hard for people to realize that governments, by definition, don't produce anything. That, you know, the only way they get things done is by taking from productive members of society. Yeah, in fact, can I elaborate on that? Because in the same way that governments don't have any resources, don't create anything, neither do central banks. So the very fact, the mere fact that the Fed or some central bank lowers interest rates, that doesn't magically create resources. Resources

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14:22are the same people who have been critical of the Fed, who have been critical of fiat money, that is money that can't be converted into anything, it's based on nothing, can just be printed up indefinitely by a printing press. It's all the people who basically hold our points of view are almost the only ones who weren't completely clueless. The only ones who actually saw this coming overwhelmingly are the ones who have this particular theory as to what caused it. Whereas the people who now are instructing us and who now are trying to run our economy, those people, well, almost none of them saw it coming. How are they supposed to fix a problem they weren't even aware of? Another question, Austin Vreneman, a member of the Young Americans for Liberty movement, wants to know, if you had to make a recommendation right now, would you encourage Dr. Paul to run again in 2012?

15:18Well, I asked him about this back in the summertime, and at that time he was saying, he seemed down on the idea, but when I look back on it and I think about what he actually said, he didn't actually rule it out, he just simply said, I can't even think that far ahead. Profile Investment Services, SIPC, MSRB, NFA, SIFMA.

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17:082008 was that he has changed the landscape forever. The Federal Reserve system is now on the table. People talk about it. Peter Schiff has an in now, partly because of Ron Paul, I think. A lot of us are getting hearings that we wouldn't have gotten otherwise. I go on all kinds of radio shows, big time radio shows, where the host knows all about the Fed. That's because of Ron Paul. But beyond that, we've got all people like you guys, young people coming out of nowhere, huge Mark Soriano, what's your opinion on a gold-based currency versus a fiat-based currency?

18:08The gold-based one is infinitely preferable because, and again, in Meltdown, I quote Henry Hazlitt, who of course wrote Economics in One Lesson, but Hazlitt said, you know, there are a lot of people who have these tiny little technical criticisms of the gold standard. He said, but the fact is a gold money is a money that cannot be arbitrarily interfered with or destroyed by politicians, and he said, now, this single merit makes all technical Criticisms of the gold standard, utterly trivial by comparison. But my view though is not so much that we should go back to a gold-backed money, or a gold standard per se. I mean, if people want that, that's fine with me. But a gold standard that would require the government to maintain it and to maintain the the ratio of dollars to gold, I think is unrealistic because You know, look at the politicians who we have in Washington. Which one of them, other than Ron Paul, would you trust to do that? I mean, what's to stop them from just going off the gold standard again?

19:15Or fiddling around with it, or whatever. I mean, why would we trust them with it? Instead, I think we need to think in more radical ways. We need to think about what Hayek said toward, sort of toward the end of his career. In the late seventies, he gave a speech, actually in New Orleans, and the speech is reprinted in the Journal of Libertarian Studies in the late seventies. Profile Investment Services, Inc., Ltd., or Israel National News.

20:04Don't insult me with that. The reason they want to control the money supply is so they can create money out of thin air and reward their friends with it. That's what it's for. That's why the government monopolizes money. Given this is the case, what we instead should do is look to the free market. The free market supplies every good we need and it supplies it the most efficiently, so why don't we look for free market alternatives? The way we start doing that is really to follow Ron Paul's advice, which is get rid of all sales and capital gains taxes on precious metals, which would serve to obstruct their use as money, and secondly, repeal legal tender laws. Those are monopolistic interferences in the free market.

20:49Get rid of that because legal tender laws mean basically that government courts will not enforce contracts that require payment in gold because the person is, because of legal tender, is allowed to pay you in the depreciating dollar. So that makes it very hard for alternatives to pop up because all alternatives are at artificial disadvantages. Let's have a level playing field and let's see how the market deals with it and we're

21:44Part of my answer is, look at those countries in the world where the gap between the rich and the poor is the widest, and those are the countries that are the farthest away from the free market. That's always the case. In the Soviet Union, the apparatchiks did very, very well. The average person suffered tremendously. Look at Africa. The only places in Africa where you've got anything approaching a free market would be Botswana. By the way, Botswana, here's a big surprise, Botswana is one of the richest countries in Africa. Big surprise there, right?

22:31South Africa, well, it's kind of a mess right now. You can find isolated pockets of the free market, but otherwise, it's a bunch of extremely Profile Investment Services, Inc., Ltd., or Israel National News. and this holds true consistently as a rule. So it seems to me that if we genuinely care about the poor, I mean look, if somebody has three yachts in a free market society, that doesn't hurt me any.

23:22He's not stealing them from me. I didn't have him to start with, I assure you. If we could just set envy aside for five seconds and actually demonstrate a real concern for people who are poor, we would not consign them to systems that have made the poor worse off. Even if you look at so-called third-way European welfare states like Sweden, American blacks on average are richer than the average Swede, and American blacks are not doing as well as some other groups in America, yet they are doing better than Swedes in general. So if you really care about the well-being of the poor, you would want to adopt the system that provides for their material well-being better than any other system. Profile Investment Services, Inc., Ltd., or Israel National News.

24:34On a virtual level, the Austrian business cycle theory makes complete sense, but when you consider it with respect to the recent crisis, it's a bit harder to put the pieces together. Specifically, the Austrian business cycle holds the capital goods industries that are most affected by both the artificial boom and subsequent bust, yet it was housing that was the prime player in today's crisis, not exactly a capital good. How does the Austrian business cycle deal with this? Well, I guess part of the answer is that housing is at the very least an extremely durable consumer good. But secondly, it's not just housing that's going to ultimately bust. It's also going to be commercial real estate. That is the buildings in which businesses operate.

25:22Or a lot of times businesses will have built an addition or they will have built a second building for a second branch of the business. And that is arguably, and in fact Gerald Salerno makes this point, that's actually going to be a worse bust than residential households are going to be. So that in effect reinforces Austrian business cycle theory that the more capital intensive will get hit harder. Well, the more capital intensive type of building projects, the commercial real estate market is in fact going to wind up being hit harder than just regular residential real estate. Real Estate. So there's that. But also remember that how are people financing this real estate? How are people going out and buying a house?

26:08Well, they're buying it basically with this 30-year mortgage thing, which is in itself partly a government intervention. Most people in the 30s didn't own their own homes. Nobody would lend to you for 30 years because you could never tell what inflation is going to do and so on and so forth. So this sort of long-term type of an expenditure is very interest rate sensitive. Unlike consumer goods like toothbrushes or hats or potato chips, a house is a large, durable purchase that is paid for over a long span of time. So I think that does, in fact, still make it qualify as something that would be artificially Transcription and Transcription of interview questions.

27:22The Austrian Theory can be conformed to this idea that you've had a boom in residential housing. One of the best things I've ever heard about the Austrian Theory was that it encourages production savings, not this kind of artificial consumption and buy as much as you can because the businesses are dying. are dying. I mean, how much more can we buy? We've been buying for so long. I mean, how much more did they want us to do? How much more debt did they want the American people to have? Right. And I've got an article coming out in the Campaign for Liberty site sometime this week, sort of explaining this, because I know that there is a superficial plausibility to the idea that people should spend because, you know, how can businesses stay in business if people don't spend? And there are a lot of different replies to that. But one that's The most relevant to today is, as you say, it's not spending per se that we need, because if that were the case, everybody should get into debt up to his eyeballs, as a lot of people already are, and then go out and spend, but then, you know, well then what will we do three weeks from now, when we're so in debt that we can't spend anymore, I mean, obviously that can't be the solution in and of itself, but beyond that, the fact is that because of the housing boom, people spent more than they should have, they thought they were richer than they really were, because everybody thinks he's sitting on a half million dollar house.

28:47Now they realize they're not, and now they realize they've engaged in more consumption spending than they should have, or they borrowed against the equity in their homes to finance consumption spending. And they wouldn't have done that if they had known the real value of their homes. So what we're starting to see now is that in the boom, it was not just housing that was affected by the boom. The boom distorts all lines of production, or a lot of lines of production, that wouldn't have occurred without the boom. And so for instance, we're now learning that Starbucks, or at least it's one store every Every 10-feet business model was a bubble activity. They are closing stores like you wouldn't believe, because when people feel like, hey, I've got an infinitely appreciating asset in the form of my house, well, sure, a five-buck cup of coffee has sky's the limit. Or a six-dollar ice cream cone with cold stone creamery, great, fine, let's do it.

29:36But we're now seeing that those are bubble activities. They're going south, fast. So it's not so much that we need spending per se. We don't need people to go out and spend five dollar cups of coffee. What we need is for the economy to realize, wait a minute, five dollar cups of coffee are not what we need to be producing. We need capital to go out of that and to produce one dollar cups of coffee. So what we need is a restructuring of the economy so that it produces things people can sustainably spend their money on. We don't want to freeze this economy just the way it is and tell people to keep spending. We're producing things that people can't afford. We're producing more plasma TVs maybe than we should be. I don't exactly know what we're producing too much of. That's why we have a price system. But we need the economy to sort out what is sustainable in a post-bubble economy and what should be allowed to go out of business.

30:26And then we will restore an equilibrium where people will spend and will be producing things that people want. But just throwing money at the existing economy is just going to prop up zombies. That's the last thing we want. On that note, the Obama administration so far has spent over a trillion dollars and God knows how much the Geithner bank program could cost. But if they continue on this path, what do you see happening in the next four years? Well, if they continue on this path, I just can't see how the economy could recover. Markets are incredibly resilient. The market was trying to recover in the early years of the New Deal. There are some signs of that.

31:11So it can fight against government intervention, but given that we've got no savings, we're very much hollowed out as an economy, it's hard to see where the resources for the recovery could come from given that our pool of savings has been stretched thin or is almost nonexistent, and then what little we have left the government wants to raid so it can spend on arbitrary projects to reward political favorites. So I don't see where the recovery could come from. So we could, you know, best case scenario, we degenerate to a West European welfare state model where they have extremely sluggish growth, if any growth at all. They have high unemployment and they pretend not to know why this is happening to them. Or there is the possibility of, you know, the worst case scenario is a complete collapse of the whole system, a complete collapse of the dollar with all this pressure being put on it.

32:07I think it's very hard to know which of those outcomes will happen, but neither one of them is completely implausible. Okay, now we have a caller, Matt, from Syracuse University. He's going to ask you a question. Matt, you're live. Hey, Tom, how's it going? Big fan. This is more of a prod than a question. So, conservative pundits and politicians who are poignant on pretty much everything when a Republican's in office, but sometimes all right on economics when a Democrat's in office, The New Deal didn't cure the Great Depression, some will even say that it didn't make it worse, but they'll usually follow a lot of step behind your Paul Krugman of the world in saying that the Public Works Project that was World War II actually cured us of the Depression.

32:54Can you just speak to curing people of this kind of fallacy, this notion that World War II was a depression? I know you're going to reference Higgs and everything. Profile Investment Services, Inc. There should be some alarm bells going off when you hear that the war was good for us.

33:42I mean, when you have a war and you've got 12 million people drafted into the armed forces, 12 million of your prime workers, and they're drafted into the armed forces, they're no longer available to produce goods and services. And 40% of the economy, 40% is either devoted to the armed forces or it's devoted to civilian employees of the armed forces Profile Investment Services, Inc.

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35:36for the 1940s that tells you that we had a great boom in America during the war. You have to ask yourself, wait a minute, do these statistics make any sense? How could we have the biggest boom in the history of the United States at a time when the economy is suddenly finding itself under unprecedented resource constraints? The best workers have been shipped away and replaced by inexperienced people and that gives us the single greatest Boom in American history? How can that be? There's got to be something wrong with this. And so the rest of the answer, and I'll make this as quick as I can, the rest of the answer is that these GDP figures are totally misleading. They're just phony numbers. GDP is a screwy number to begin with under ideal circumstances.

36:21But basically what happened is that the economy was so controlled by the government during the war that so many of the prices were just dictated by the government. This is what we're going to pay for this good. Now, you go and produce it for us for the war. And this has spillover effects and affects other prices in the economy. Prices are only meaningful if they arise voluntarily between the bids of buyers and sellers for products. But if the government were to arbitrarily say, from now on, the price of eggs is, we declare to be $10 per egg, and the government is going to order a million eggs,

37:27Profile Investment Services, Inc., Ltd., or Israel National News. One of the hosts mentioned earlier that they had a liberal fund at their school that kind of couldn't see through the free market view on this. I'm wondering if you can speak to how the current financial system, how the Federal Reserve, how the government is currently set up, how that kind of feeds into the warfare state.

38:18I feel like a good answer on that would be something that could appeal to more liberal people. Yeah, yeah. Well, I mean, think of it this way. Is government going to be more able to wage destructive wars and by and large without the full enthusiastic consent of the population? Is it going to be more likely to be able to do that if it can just print up the money it needs to finance it out of thin air? Or if it has to actually go to the population and get the money either through borrowing from the population or through taxes? The question answers itself. If you really, really honestly care about war, and it's not just posturing, and it's not just a way to skip school for the day, but if you really believe it, if you really believe that war is evil, and that a lot of these wars that we've seen in recent years have been just unbelievable atrocities, well then it's very hard to take you seriously if you're going to say, but the government needs to be able to create out of thin air, out of absolutely nothing, with nobody's consent, even if the population is dead-set,

39:19I mean, that was what made Vietnam possible, because how did Lyndon Johnson finance that? I mean, a very, very large proportion of it was through just creating the money out of nowhere. Likewise for the Iraq War, taxes weren't raised, so where did the money come from? It was basically borrowing from foreigners and then creating the money, just printing the money up, and that's what made the war possible. So you can tell me all day long about you're all tears and pity for the Iraqi people and how terrible this is. But if you're going to sit here and either ignore or actually defend the government's power to fund these atrocities with money it has a monopoly on creating, you've just got to be kidding me.

40:11So, I mean, now you probably want to say this a little more nicely in a nicer tone than I just did, but I mean, as I say, if the war machine also runs a money machine, do you think there's going to be more war or less war? I mean, this is not brain surgery. Well, thanks a lot. Just one more question, Mr. Woods. Do you have an idea for another book? I've been writing an awful lot of books lately, so in the immediate run, I don't, just because I worked just day and night on Meltdown and it really took a lot out of me to be honest with you. People have actually been writing to me and say, ìHey, you're writing books faster than I can read them.î Well, then maybe right now I'm going to let people catch up a little bit while I get some recuperation.

41:00I'm not going to lie, I was impressed with all those citations and you sourced everything that you said. There were five pages of sources in the back and I love it and I'm going to go through all of them as soon as I have the chance. Thank you very much Mr. Woods, I guess we're going to conclude. Thanks for talking to us, it's been a very enjoyable experience and we're grateful that you took time out of your busy schedule to talk with other Liberty-minded people to get the message out there. So to everyone listening, Buy Meltdown. It's available on Amazon.com. It's a great book and I highly recommend it. Thank you very much, Mr. Woods. Thank you, guys. And check me out at TomWoods.com where I've got a free chapter of the book available. Alright. Thanks a lot. Okay. Thank you, guys.