Bernanke and the Dollar

0:00I will try to go through this one, the prepared remarks, fairly quickly to leave time at the end because I, just to give you time for Q&A just for whatever we've talked about or haven't talked about, things you're curious. And going around, I've noticed especially with investors and things like this, this stuff is the one that really makes people get nervous. Let me just talk a little bit about, James mentioned that we go around the country and for those of you who agree with the message of the Mises Institute, it is encouraging, I will say this, going around, I mean there are more and more people who are becoming aware of these things and are concerned. I've seen that there's a change. First of all, the turnout. When you go to these events that we put them on over the different places, they're getting bigger and bigger. And also the type of person that comes. It's people who, it's not like they were real ideological their whole lives. Like there's more and more people who are just saying, hey, you know, what the heck just happened? I lost 40% in my portfolio. You know, that's kind of scary. I joke with my parents. They're in a similar situation. They just recently retired. They had a bunch of money.

1:11I told my dad to start smoking. That was my solution.

1:22So you do see that transition. Or another sort of indication that the Austrian messages reaching a bigger crowd. When I would write articles for Mises.org, five years ago, I would get fan mail from college students mostly. People say, oh yeah, my professor loves Friedrich Hayek and he makes me read this site and hey, that was a pretty funny article. He had great stuff. Now it's people who work on Wall Street for hedge funds saying, what do you think about, is there a bond bubble or what do you think about this? So it's people that are realizing now that they're taking this seriously because no one really cared about what was the multiplier on government spending eight years ago. Nobody cared about that except economists and real nerdy Austrian fans, right? But now people do care about that because they know if a bunch of economists say it means one number, then they're going to spend another trillion dollars.

2:11And so they realize that this stuff actually is important and so more and more people are curious about Austrian economics. It doesn't mean that they're all full-fledged Austrians, but there is a lot more interest in the stuff that the Mises Institute does. And it's good, therefore, that the Institute was there with all this literature available, all these lectures. Because say what you will, the Austrians are pretty good about communicating stuff to the lay person. So I think that's partly why we have our foot in the doors, because people actually understand what we're saying. And it's not just that we put up a bunch of equations, they trust us. I'm from MIT and I'm here to help. All right, so this talk here is Bernanke and the dollar. Let me just walk you through some of this stuff. The first thing is, let me try to explain it, inflation, fractional reserve banking.

2:58This is tricky stuff. When I had to teach this in Hillsdale to students, I would tell the janitors to lock all the windows to make sure kids weren't just jumping out. This stuff can be very boring, but in this context, I'll try to make it as easy as possible. It really is important for you to understand the basics of this because when people say, People say, oh, the Fed's doing quantitative easing, pumping in $600 billion, a lot of people don't really know what that means. What do you mean the Fed's pumping in $600 billion? What do you mean? So I'm just going to try to walk you through the mechanics of what's going on. Now, this business partner that I have in Nashville, I've seen him give some PowerPoint presentations about inflation, and he always starts, he doesn't start talking about the US government, because I think it's hard for people, because based on your political views, you know, you might be defensive or whatever,

4:21over here, he's got his army to maintain, he's got bread to hand out to people, and the, you know, Colosseum, bread and circuses was the catchphrase, alright, so he's got to pay a lot of stuff. So how does he do it? Well, he can tax people, but if he taxes them too heavily they get mad, they revolt, so he doesn't want that. So what does he do? One clever trick that he would do, he would debase the currency, so you have a bunch of gold coins and then you take some baser metal and then you melt down the gold coins, mix in the baser metal and then re-strike coins and now instead of you know three gold coins now he's got five coins that have some gold in them but they of course their gold content is not as high as it was because he mixed in the baser metal so that's what the term debasing the currency that's originally where it comes from is that they literally would

5:12And watered down, so to speak, the silver or the gold that was in the coins. So what would happen, of course, is the prices would go up. So you were a merchant and you start getting coins for a fish that used to cost one coin, and then you realize, wait a minute, there's not actually as much gold in this coin as there was last year. You're going to raise the number of gold coins that that fish costs, right? Because you're obviously, what you're concerned about is the actual gold content, not how The Theory of Money and Credit Right now, if you look at your coins, even, there's notches around it, that's where that comes from, that you could easily tell by just visual inspection if someone had been clipping the edge of the coin, if they had those notches in it, right, you could be able to tell.

6:23All right, so there's all sorts of little tricks of people debasing the currency over the years, but you get the basic idea. So what was ultimately happening was, Caesar had a certain amount of tax revenue, and he, in the short run at least, made it look like he had more money by debasing it, so he goes Mises talks about the fall of the Roman Empire. That's partly what happened. Rome just kept debasing the currency. You get price inflation. People complain because, hey, bread costs more now than it did last year. What's going on? And then they would pass strict price control laws. When Mises talks about the fall of the Roman Empire, that's partly what happened. Rome just kept debasing the currency. You get price inflation. People complain because, hey, bread costs more now than it did last year. What's going on? And then they would pass strict price control laws. Say, if we catch any merchant trying to charge more for bread than he did last year, we'll cut your hand off.

7:13And so then people just stop making bread. Why would I sell it if it's costing me more than I can sell it for? And so now people are leaving the cities, going to the countryside to forage for food. OK, so all this stuff that you may have learned in your Western Civ class in terms of the historical progression and just, you know, the way there it's explained is all of a sudden for some reason the barbarians were able to overcome the Roman armies whereas for centuries before they couldn't, Mises actually gives an economic explanation for why that was the case. It was because of all this stuff going on. That's what the difference was. It wasn't that the Roman soldiers forgot how to use a spear all of a sudden. Alright, so Uncle Sam also has bills to pay. So you got huge military expenditures, food stamps and all kinds of important stuff in outer space, right? So now here, this is where it gets a little tricky. So I think everybody understands the thing with what Caesar was

8:14The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit

8:44So, this is a treasury bond. So, specifically what happens, the U.S. Federal Government runs a deficit, right? So they take in a certain amount of tax revenue, and then they spend more than that. So they have to cover that deficit somehow. Just like a corporation, they issue bonds. IOUs, this thing saying to somebody in the marketplace, here, we'll give you this legally binding IOU, you give us money right now, we're going to go spend it. on tanks and food stamps and whatever, and then this thing says that whatever, 10 years from now we'll give you your money back plus some interest, or we'll make interest payments all along the way and then give you your principal back 10 years from now, if it's a 10 year bond. So that's how they're covering their deficit, but where the Fed comes into play is the Fed is a huge buyer of this government debt.

9:40And so that's what I'm showing here is that this new money is being created and so Bernanke is just creating extra money and using it to buy debt. So the same way that Caesar had three gold coins and then turned it into five by debasing the currency, analogously here I'm showing you started out with $300 bills and now all of a sudden there's two more that the government has its hands on. Bernard has his hands on it and so where did that money come from? The Fed created it out of thin air. Now specifically, what happens, and this is the part that gets a little tricky to visualize, Bernanke, when he wants to, let's take this recent announcement of quantitative easing, Bernanke is going to buy $600 billion of more government debt. He goes out into the marketplace and he buys it from people who had previously bought those bonds from the government. So the Fed is not literally working with the Treasury.

10:35go through a middle man. So how does Bernanke come up with $600 billion, how does he get the $600 billion? Well it's not that he was cutting lawns all summer and saved up $600 billion and now was going to spend it. He just writes checks on the Federal Reserve, just out of thin air. It's not that there's a stockpile of money that whenever the Fed buys money you have to debit that account. Uh oh, we're running low on money, the Fed has an unlimited amount of money. Right's checks on the Fed, gives it to somebody in the private sector who has these bonds. That person now has a check from the Federal Reserve, deposits in his checking account, and then his bank, his commercial bank, its deposits with the Fed go up by that amount. So one way of thinking about it is when Bernanke wants to get $600 billion in bonds that are Right now in the marketplace, just imagine he's opening up an Excel spreadsheet that

11:31says, up, Citibank has this much on deposit, Bank of America has this much, and he just bumps up the numbers in those cells by 600 billion, and all the banks hand over 600 billion worth of bonds, and now the Fed's sitting on those bonds, right? So that's, you know, sometimes when I tell people that, sometimes they don't believe me, but that's what it is, right? There's nothing backing up with the Fed does when it creates money. Okay, so, of course prices go up, and then I show Bernanke being consternated, but actually, they want inflation now, paradoxically enough, the whole point of this is they want price inflation to go up. Is a little esoteric, let me just walk you through this quickly. A lot of people associate with the Mises Institute, it's not merely the Federal Reserve doing this stuff that they think is the problem, they think it's the fractional reserve banking Banking System per se. And so the process I just described, there's a version of that

12:26that happens even that your commercial bank can do, in a sense creating money out of thin air. So, I'll just walk you through this example. Let's say this guy's got $1,000 in actual currency and he puts it in Washington Mutual and they go put it in the vault. Okay, so now what happens, that guy electronically, he's got checking balance of $1,000. You say, Last Tuesday, I just put $1,000 in the bank. Let me go to the ATM, let me show you, put my card in there. Look it, I got $1,000 in the bank. So he's walking around town thinking he's got $1,000 he can spend. So that's clearly part of the money supply. But now what does Washington Mutual do? Well, maybe this woman comes along and she wants to borrow some money to buy a used car. And she borrows $900 from Washington Mutual. So she signs the note to borrow the $900.

14:16Part of what's going on with the boom-bust cycle, Austrians think if you really get into the literature that they think fractional reserve banking has a lot to do with it. Okay, so summing up, the Fed creates new reserves in the financial system, what's called base money, when it buys assets, so treasury bonds, also they bought a lot of mortgage-backed securities when the financial crisis really hit. Commercial banks also create new checking deposits. Those are broader aggregates, like M1, M2, those sorts of things, when they make new loans that are backed up by the new reserves. And then the injection of the new money available to borrow pushes down interest rates, causing the boom-bust cycle as Mises-Hayek described. Okay, so this is, I'm sort of tying in a few threads here, but when the Fed creates new money by buying stuff, And so, again, if you think the market interest rate that corresponds to the real savings means something, well, then this is going to set up that boom-bust cycle we talked about last lecture.

15:16Okay, and then beyond that, beyond the boom-bust cycle, just in general, why is there this secular increase in prices year after year? means something, well then this is going to set up that boom-bust cycle we talked about last lecture. Okay, and then beyond that, beyond the boom-bust cycle, just in general, why is there this secular increase in prices year after year? They say it's because of the fact that the Fed and the banks are literally creating more money all the time when they do this. And you can see here, Austrians, especially the ones associated with the Mises Institute, tend to be fans of the gold standard. Meaning they say, look, given that you're going to have a government controlling the money supply, at least tie its hands somehow.

16:03And the way to do that historically was the classical gold standard, that originally, if you had $20.67 in US currency, You could go up to the government and say, I want an ounce of gold, and they would have to give it to you legally, because the dollar was backed up by gold, and that tied the hands of the government. They couldn't just print up new money recklessly, because, loosely speaking, that would push up the price of gold, and then people would turn in their dollars for gold, and the government's gold reserves would get drained, and so they'd have to back off and not print so much money, because they would be in danger of losing their gold reserves. So, I'm sure most of you know this, but just in case some of you don't, Well, that ended in 1933. One of his very first things coming into office, FDR literally seized the gold from everyone in the United States. It was under threat of a $10,000 penalty

16:56in a jail term. And that was back when $10,000 was a lot of money in 1933. So the Bullion Depository at Fort Knox was built to store all the gold that FDR took from everybody. So that's, you know, you hear about, oh, there's gold in Fort Knox. They had to build that because to steal everyone's gold, you've got to put it somewhere, right? So, they, and then from 33 to 34, there was a, FDR was fixing the price of gold, and there were some funny anecdotes that I have in my depression book about his advisors coming in and saying, what's the price of gold going to be today? And FDR just picking a number that involved a seven. And he said, oh, because it's a lucky number. And the advisor in his diary said, if the The public knew how we were fixing the price of gold, they would be horrified, right?

17:42So there's some weird stuff. But then after World War II, we were on the gold exchange standard Bretton Woods system where other central banks, not US citizens, but other central banks could turn in dollars the rate of $35 for an ounce of gold. And that was true until 1971, when Richard Nixon even ended that. And he said, you know what? Forget that. You know, the dollar's backed up by nothing now. I don't care if you turn in dollars. and the private forum. Okay, they could? Okay, great. I wasn't sure of the private forums, but yeah. So the US citizens couldn't do it all in this period. Central banks up and through 71. And this is now here, the point of this chart, consumer price index. So you can see, you know, prices went up here.

18:31They're pretty stable up. They came down a little bit in the early stages of the depression. Okay, I'm okay, okay. And then right in 1971 when Nixon formally untied the dollar from any tide of gold, you can just see how much inflation took off, price inflation. So especially for people my age and younger, and don't let my hairline fool you, I'm actually not that old, I just have grown up thinking, oh yeah, prices always go up, that's just the way things are. But no, that wasn't the way things always were. If I had put this back over here, for several decades, let's say from 1830 to 1930, if you hit $100 in terms of what kind of goods and services could you buy with that, it was basically the same.

19:23I mean, some prices would go up, some would go down, but basically $100 bought you the same amount of stuff for 100 years, because again, it was tied to gold, because basically The theory was measuring how much could an ounce of gold buy, and there was no reason that gold should become less marketable or exchange value less against a suit or against oil or what have you. But then once you lost that tie, especially here when you explicitly sever it, you see. So what happened is because, of course, at this point onward, the government now has no fetters on it and can just print money like crazy. The only check on them printing money is if prices rise too much, people get mad, and some people recognize the connection. Okay, so if you get the general idea of what's the problem now, there's two things.

20:14All right. So first of all, if you bought the basic story I told you last time about what, you know, what big picture, what is the Austrian version of what happened with the housing bubble? We're going to say there was a dot-com bubble. Late 90s, you remember tech stocks were going through the roof. That burst in the early 2000s, and then you had the 9-11 attacks. So on paper, there should have been a bad recession. And yet, there wasn't. Why? Because Alan Greenspan cut interest rates pretty significantly. So here you see, here's 2000 right there. This is the federal funds rate, it was at 6.5% and Greenspan brought it way down and then brought it down even further. So he brought it down to 1% and it stayed there for a year.

21:01Okay, so you can see just historically that was a pretty low amount and then I showed you the red line once you adjust for price inflation it was really low, at least since the late 1970s. Okay, so, but in terms of just the absolute number, without looking at price inflation, this was as low as it had been since World War II, basically. So, the Austrian story is that's what fueled the housing bubble. I mean, there are other stuff going on, too. Fannie and Freddie, obviously people in the private sector made mistakes. You know, the Austrians don't think everything's blamed on the government. There were people who made foolish mistakes in the private sector, too. to do, but the point is in terms of what fueled this orgy of this huge speculative bubble, they're going to say this had a lot to do with it, and then you see once they started raising interest rates, that's when the bubble eventually burst.

21:54So the basic Austrian story there is going to say Greenspan was not the maestro. He didn't do us any favors by bringing interest rates down. All he did was postpone the reckoning and made it that much worse. In other words, in the fall of 08, when the world seemed like it was ending in the financial sector, people would have looked back with nostalgia on the dot-com bursting. And they would have said, if only we had just sucked it up and gone through that recession back in the early 2000s, instead of pumping up the housing bubble and postponing the Day of Reckoning. So if that's true, well then look at what Bernanke's done. He's pushed interest rates down to basically zero and held them there for much longer than Green Span did that and so the concern is what if this right now is actually the calm before the storm, that this is like the housing bubble years but the bubble is maybe in bonds or in some other area that we're not sure, okay, that maybe there's going to be a bigger

22:56crisis in 2013 and can you imagine if at that time we're looking back at 2008 and saying The Theory of Money and Credit

23:33on the financial system compared to what Greenspan did. If you look at the actual money supply, look at this one. So this is the monetary base. That refers to the amount of bank reserves and currency that's in circulation. Okay, so it doesn't include checking account balances, if you care about the definitions, but this is basically the single metric in terms of what can the Fed directly control with its buying and selling of assets, it's the monetary base. Alright, so as you can see, it was pretty low for a long time, it starts coming up rising here. Rising here, this little blip right there, that was what Burt Greenspan did because of the 9-11 attacks.

24:23That he was worried that the people were going to try to take their money out of the financial system, so he flooded the economy with liquidity. There were people freaking out about that, saying, whoa, you can't put that much money, you're going to mess things up. And then, you know, some were saying that, oh, I'm sorry, I'm off by ear. This is, this was because the dot com, or the Y2K, right? This is right before, sorry about that. So this is, he was worried because the people were freaking out about, remember, the Y2K switchover, that people were going to just take all their money out of the banking system. So he was flooding it with liquidity to make sure there was no question about checks cashing and clearing working. And then some people say that that actually fueled the dot com bubble at that time and that was part of what happened there.

25:36The gas prices went up to $6 or $8 a gallon, right? So what's going on here? This money, you may have heard people talking about this, these are largely the reserves. This increase is mostly sitting in the banking sector. Okay, so what happened is Bernanke basically wrote checks on thin air, bought mortgage-backed securities and other things that, had they been valued at their market prices at the time, a lot of these major investment banks would have been insolvent. They would have all failed, just like Lehman had gone under. So how to avoid that, Bernanke starts, he did all sorts of things, like short-term swaps and things, but part of what he did also was just literally buy hundreds of billions of dollars worth of this stuff off their books at par basically and giving them a higher price than they would have gotten if they had to sell it to someone in the private sector, putting on the Fed's balance sheet and instead, so now these banks who originally might have had $100 billion in mortgage-backed securities where people are defaulting and not sending in their mortgage payments, they give it to the Fed and they get a $100 billion check written on the Fed and they just sit on that. So now they have $100 billion in reserves electronically with the Federal Reserve. So they have the legal ability to make new loans based

26:50Are you surprised that they were giving money to Verizon and Harley-Davidson just came out two days ago?

27:20The Federal Reserve is technically not part of the government. It's a central bank. It's basically a cartel enforced by government regulations, but it's owned by private shareholders. Technically, it's not part of the government. It's this independent thing, legally speaking. So when Bernanke's doing all this stuff, for example, AIG, remember that giant insurer got in trouble, and the Fed initially bailed out with 85 billion. And so they had a meeting and Barney Frank was apparently there, who was a big congressman, and apparently asked Bernanke, do you have 85 billion? And Bernanke said, I have 850 billion. And Barney Frank I think Barney Frank was still of the mentality that he's working for Congress and we spend a lot of money but we have to get it from somewhere and I don't think it hit him that when Bernanke, what does it mean to say to Bernanke, do you have 85 billion? He actually has 850 quadrillion. He's got as much, he can just buy whatever he wants technically.

28:35The only thing that would happen is the dollar would, prices would go up. And then another issue is they called Bernanke before, I don't remember which subcommittee it was, but some In December of 2008, Bernanke was given billions of dollars to these various investment banks. They said, we're not second-guessing what you're doing, but can you give us a list of which banks you're bailing out and how much you're giving to them? And Bernanke said, no, I can't do that because that would defeat the purpose of the program. If I were to tell you which banks are in trouble and that I'm bailing out, investors would The Federal Reserve Now is Considered this Independent Mighty Thing in its Own Right The Federal Government can't do it now. It's up to Bernanke to save the day.

29:43So again, this right here, these are reserves just sitting in the banking system. They have the legal ability to make loans on top of that. So if the economy were normal, and interest rates were 8% or whatever, and banks all of a sudden had over a trillion dollars in excess reserves just sitting there, They could legally go out and make loans of up to 10 trillion more. Okay, so I ran the numbers just to get a back of the envelope calculation. I did this like a year ago. I think the numbers haven't moved too much since then. But it's that there's, legally speaking, if the banks lent out all that money and create as much new money as we talked about in the little example of making a car loan, if they went ahead and did that, then there's enough money waiting in the wings, so to speak, to make the overall money supply go up by about a factor of five.

30:38Okay, so, you know, gasoline's three dollars a gallon now. Say gasoline would be fifteen dollars a gallon. So I'm not, I'm not predicting that's going to happen. I'm just trying to get you to see why so many economists are horrified by this picture. That they're going to need to undo this at some point because if they just let it sit like that, eventually if the economy pulls out of this, they've pumped in so much money that, you know,

31:32In the 70s onward, there was a sharp appreciation of the dollar against most other currencies, but then since basically Greenspan started lowering interest rates, you see there has just been this pronounced decline. It spiked up during the panic of 2008, but now it's resumed falling again. So you see this general decline in the purchasing power of the dollar against other currencies, And, you know, again, a lot of us are just concerned here about that last slide in particular. They created a bunch, and it looks like that's Bernanke's solution. Whenever he hits a bump in the road, what does he do? Let's just create a few hundred more billion dollars. And so the, let me just, the sort of thing I'm worried about, the official story, if you asked Ben Bernanke, or you asked somebody who thinks this is the right thing to do, if you said, well, how, what are we going to do about this, he's going to say, well, That's going to naturally unwind. When the economy starts recovering, interest rates

32:31start rising, inflation expectations pick up, banks start lending that money out again. We'll just suck this all back out, right? The Fed will just undo everything it did before so it'll start selling off mortgage backed securities, it'll start selling off government bonds, undoing this, it'll destroy reserves and bring that chart back down. One kink though in that is suppose what happens is, let's say China announces, we're not going to buy What does that mean? That means bond prices would fall. That's what it means if interest rates spike. So it's possible that the Fed right now sitting on a huge portfolio of government bonds, if it loses 30% in value overnight because of a dollar crash, even if he sold off everything and sucked reserves out, he wouldn't be able to suck as many reserves out as he had pumped in, right? Because, loosely speaking, let's just say that the Fed is going to lose 30% in value overnight because of a dollar crash.

33:27Let's say there's $600 billion in quantitative easing. Let's say he buys $600 billion right now of government bonds, but then the dollar crashes and those bonds fall to value of $400 billion. Even if he sells them all, there's still $200 billion in excess reserves that he can't suck out anymore, right? Because he lost market value on the assets he was going to use to unwind it. So that's the sort of thing that I'm concerned about is if this scenario that we're talking about comes true that their plan for unwinding all this and just undoing it isn't going to work. And so that's what makes me a little bit nervous. All right. So why don't I stop there on that pleasant note and turn it over to your guys' questions. We've got, so we're going until two, right?

34:13Yeah. So we've got up to 19 minutes of fun-packed questions. Yeah. Okay, so I wish I don't have the actual slide to show you. Let me repeat. This is when people say, oh, what did Bernanke do with the money supply? It depends. What do you mean by that phrase money supply? Okay, so this is the measurement of the very narrow measure of the reserves that the the commercial banks have, and it's also the paper that's in your wallets, but it's not measuring your checking account balances with banks. That's called M1, and everyone has some other things in it too. So M1, if I plotted that, does not look like this. M1 went up, but not nearly as much as this. So in terms of the amount of money that the public is holding, the chart's not nearly as scary. The reason this is scary is because this could lead to if banks start lending this stuff out by making loans, then the amount of M1

35:17would go through the roof too. So partly why you haven't seen gas go up to 15 dollars a gallon and so forth is that the public doesn't have its hands in this money. But another factor is what he's bringing up is that even if the supply of money has increased, people People are hoarding it. So people are accumulating larger cash balances. They're not spending money as quickly. Money's not changing hands as quickly as it normally does. That's called the velocity of circulation. So that is way down. The velocity of money is way down. So the point is that sort of offset a little bit what Bernanke has been doing. Put another way, if Bernanke had sat back and done nothing, prices would have crashed. And you may remember Over in late 2008, oil fell from, I forget how high it was, it was over 100 a barrel in the summer and it came way down to like 33 or something.

36:12So commodity prices absolutely crashed, consumer prices were actually declining from month to month in late 2008. If you went to the grocery store, stuff was getting cheaper, because people again were hoarding money and they weren't creating enough new money to offset that tendency. So you're right, there is that factor involved here, but I think now as people have calmed down a little bit and now they just realized, okay, we're in just a bad economy in the long haul, but they don't think the world's going to come to an end, that's going to pick up, that people are going to start spending more money. So the problem is it can just flip like that, that once, if it does get to the situation where people think, uh-oh, price inflation's here, I don't want to be sitting on so much cash now, let me get rid of it, it's going to unwind very quickly and go from stable ."

37:15OK, speaking of which, if you take nothing else away from this, there's a funny, if you go to YouTube and type in Bernanke was wrong, there's this hilarious five-minute compilation of just clips of him on CNBC and giving Senate testimony from back to 2005 through like 2009. And it's just, at every stage in the crisis, just totally wrong, right? So in early 2005, they were, you know, it's like, what's her name, Maria Bartoloma or something like that, saying, you know, Mr. Bernanke, at the time he wasn't Fed Chairman, he was, I think, the Council of Economic Advisors to Bush, saying, you know, people are talking about a housing bubble, what do you think? And he's like, oh, there's some froth in the markets, but no, I don't think we're in a housing bubble. in 2005, so totally wrong. Later when the subprime blew up, they're asking him, do you think this is going to spread? He goes, no, no, I think it's going to be contained in the subprime. It's not really going to affect the real economy. That was totally wrong. And then it's like in, I think in 07, in like August of 07, he's testifying saying that, yeah, the economy right now is being, growth is being, there's a drag on growth because of the collapsing subprime sector and all that stuff. But we're going to work through that in 2008. It's going to be really strong. And he's saying this in late. So, I mean, even as

38:26As late as August of 07, he thought 2008 was going to be a good year for the economy when, of course, that was when things were really awful. So that's part of it, too, that you say, when he got reappointed, and I wrote some op-eds at the time on this saying, what more would he have to do to show he's not the person to be at the helm of the Federal Reserve than to have been wrong at every single stage of this crisis? But he got reappointed. I guess it pays to have bailed out a bunch of bankers, yep. In the last lecture you had a great chart, it had correlations between the upcoming presidential election and recent ones, part of this election. It seems to be a pretty good correlation. I think so bad now is that if you wanted to sell the bond, if you were elected, and you tried to just create more money, would it actually do any good, like kind of putting on the accelerator when your budget is broken and it's too far gone?

39:24And also, if you did do that, when would you look for the signals? Right. ______________________________________________________________________________________ Yeah, there's certainly is a thing called the political business cycle and people have done like econometric studies of that and you're right it does look like it's not just randomly dispersed that it looks like the gas is put on right before an election and One could argue even with this last one, technically they announced the QE2, they started making hints in the summer, and they said, oh, we're going to do it the day after the election, we're going to announce how big it's going to be.

40:10The official cover story was, well, see, we're not being political, we're doing it the day after the election, but the dollar was sinking against other currencies that was actually helping exporters, the stock market, I don't have the chart to show you, but the stock The stock market came way up since the summer so it's just the market expecting something is enough to get it going so I'm not sure to answer your question I would need to look at the numbers and try to come up with something but it's if if you looked at the chart of the S&P 500 it's you know Obama gets elected and then and then it's still plummeting and then in March of 2009

41:23are right here and they get it first and the government is here and they get it early in line and then, you know, widows getting social security checks are way down at the end of the line and so they see their prices go up before they get that new money. So I'm not really sure how to answer your question but definitely they could at least pump up the stock market and make people on the investment side feel like, okay, things are looking up if they announced another round of quantitative easing. They'd have to wait, because like you say, it's, you couldn't have a good economy early on because people wouldn't get used to it. So yeah, like if they announced it a few months, basically what they did this time, I think they had to start announcing it like in August and just start leaking things out and making it more and more, like how much is it going to be, maybe it'll be a trillion, maybe it'll

42:06be 800 billion, you know, and that's the way they sort of goose the stock market. As far as the unemployment benefits, or the unemployment rate, I think one way they can Tinker with that is messing with the unemployment benefits and that it's paradoxically the way you would actually get the unemployment rate to fall would be to cut off the benefits and it's, you know, there's plenty of like the actual recent Nobel Prize winners that was part of their work was showing it's pretty intuitive that if you're someone looking for work and you have a few really awful offers but you're holding out for a better position, the thing that allows you to persist and say, well, I'm not going to go work at McDonald's, I'm holding out because I'm an engineer or something is going to be if you're getting checks in the mail, and just statistically, if they stop paying people, some of them are going to go back to work taking miserable jobs, and so, it's, if they wanted to actually

42:57get the unemployment rate to fall, they could stop extending the benefits, but they would probably want to do it several months out so people wouldn't just get cut off and then go vote and say, oh, I'm not voting for that guy, he just cut off my benefits. Other questions? I have a question, but I need to ask this one first, because I want to say this is a question I've been doing for a long time, and the leadership did it the rest of the time, and he said that China didn't roll over the death of Barry Hayek and the Trump dollar point. He says that the federal government, they don't have a Trump dollar sitting around, and they would have to, you know, Bernanke would have to create more.

43:39It's like a trillion dollars. I don't remember the exact number. So it's when they talk about that, it's not that they're literally sitting on green pieces of paper. They're obviously sitting on Treasury securities, bonds. So the problem everyone's talking about is what if they stop buying new bonds, having their stockpile grow. But as Schiff is mentioning, forget that. What if they just stop buying altogether? And then as these things mature, they just let it actually shrink so that they're not rolling over the principle. And this is related to part of the problem with what the Fed is doing now with this quantitative easing, is they're buying longer-term government debt, okay, so it's specifically five-year securities, and so what's happening is, if you are into this stuff, but the maturity on the outstanding treasury debt is now, or the duration is lower, okay, so So in other words, the composition, so it's not just saying, hey, what's the federal debt right now?

44:44What is it, like, 13-some trillion dollars? The composition of it has changed recently, that now it's more in terms of short-term debt. And that's fine. If interest rates stay like this for the next 10 years, because it's, you can borrow more cheaply at a lower interest rate if it's shorter, right, because they can borrow basically at almost zero if they do three months, whereas if they, you know, borrow at 10 years, it's a higher interest rate. But the problem is, is there a role in that stuff over? So now if interest rates rise, they have to roll over a lot higher percentage of the outstanding debt right away, that they're going to be caught with their pants down, so to speak. So I think that all ties into what he's talking about. Things could get really ugly really fast because right now they've positioned themselves that if things just are like this and the projections play out the way their economic forecast predict, they'll be okay and unemployment's going to be high for the next several years and we'll

45:38The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit

46:08I bought government debt, it's not really inflationary, but the fact that it is, it's rough, isn't it?

46:38If the government is running big deficits, you tend to see large price inflation. And so people sometimes think, oh, a government deficit per se pushes up prices. But as Mr. Ostrowski said, that's not exactly right. If the government just takes in more, the government takes in a trillion dollars in tax revenue and wants to spend $1.1 trillion, so they need to borrow $100 billion, if they just borrow it from us, there's no reason for prices in general to go up, because the government spends more, but we spend less. There's not more dollar bills floating around because of that, just like if IBM wants to build a new factory and issues bonds and borrows money from people in the private sector, that just changes the composition of the spending, right? You spend less than going out to eat or whatever and IBM spends more and it's building a factory.

47:24But when the loan is coming from the Fed, basically, they're creating new dollar bills. That's where Bernanke's getting the money to lend to people, it just creates that thinner. We had a real estate bubble, but there was also a real estate bubble throughout the world. What would be the Austrian explanation for that?

48:04How can that be Greenspan's fault? So one thing is there are some other countries were pegged to the dollar and this came up earlier that other countries that were pegged like by Greenspan inflating the dollar would have normally fallen against their currencies but because they didn't want that to happen they printed more to offset it so that's one issue and unfortunately I did see that I came across some fact that I hadn't realized before to The Fed in effect has been, and is, the world's central bank, which actually is true, as true as it was all the time, Ludwig and Mises long since collapsed without it being treated as a reserve by other central banks all over the globe.

48:57So, as the Fed prints more dollars, what are called reserves, now they're not actually reserves, the language is retained, but as the Fed prints more dollars, these dollars end up at the call of the vaults of the world's other central banks, and because they are in quotation marks, reserves, they are in a position themselves to turn out to be like their own currency. So that has been a part of where that basically is why the world's financial system is so complicated at this point that, you know, you get a bubble one place and very easy to transfer it somewhere else. I really think that thieves are everywhere.

49:44Well, that's a different way of, yeah, a different way of expressing it at any point, I guess. Yes, sir. With regards to market theory, with the Austrian School, how does that relate to, say, efficient market versus free market?

50:23Work, and there's this school of thought coming out of the Chicago tradition called Rational Expectations and Efficient Markets. And so some of these guys, so the Austrians don't go that far, so some of these guys literally, Eugene Fama is one of them and I sort of made fun of him in one of my Mises articles, they, even after what just happened, like you saw that thing in the Las Vegas bubble that I showed you, or the Nevada bubble, they'd say, no, that wasn't a bubble, what are you talking about? And you say, well, what do you mean? Of course that was a bubble. What else would it be? And he would say, well, no, because think about it. And he'd sort of use this argument to say, well, let's say, it's impossible. It can't be the case that everyone in the market knows we're in the midst of a bubble. Because if they did, they would just sell. And then the bubble would disappear. So it's impossible. I mean, they dress it up with

51:10math, but that's their argument. That, yeah, prices can be volatile, but you can never know that you're in the midst of a bubble. So the Austrians, many of them don't go that Now, there's another, sort of the other extreme, a lot of interventionist economists subscribe to various models like psychological or what's called behavioral finance where they look at herd behavior and try to explain huge swings in the market, not on the basis of fundamentals

52:18The reason you had these extremes is look at what, surely it's relevant that the Federal Reserve is creating money and pumping into markets trying to push down interest rates. So it's not just all these wacky human beings when they get in the financial sector they start going crazy. It's very systematic things as to explain where these swings come from. So it's sort of a mix. But on the other hand, they're not like the Chicago school that just says efficient markets all the time. We can never know that we're in the midst of a bubble because it would get priced into to it, and that information gets reflected instantly. So I think the Austrians, they're in the middle of those two camps, so to speak. On the one hand, the Chicago School Efficient Markets guys, some of them literally say there's no such thing as a bubble, that's impossible. Whereas a lot of the Keynesian behavioral finance guys just think that there's bubbles all over the place and we need a strong SEC or otherwise these nut jobs on Wall Street

53:10will just always have crashes every few years. Yeah? Mm-hm. Right. Yeah, that was certainly an aspect. And just so you guys know, to understand the intellectual mistake, how was it that so many smart people with billions of dollars on the line — why were these banks making these

54:14They would say, like, oh, well, they follow a stochastic process, and it's this kind of a distribution. But they were independent variables. So in other words, real estate prices in Las Vegas was one thing, and it had a mean of this, and this was the distribution, and so forth. And then in California, they had another thing to show California home prices. And so they had all these independent variables. And so they would say, you know, we looked at the data historically going back 100 years. The chance of a real estate market dropping 10% in one year is such and such. and put that in the model, but then the chance of that happening in 100 different real estate markets simultaneously is that number raised to the 100th power, in their mind, because they thought they were independent events, because they thought real estate's local. And so that's why they gave such a high rating, because what these mortgage-backed securities were, you would buy, let's say, 1,000 mortgages from all over the country, put them into a

55:02pool and then slice and dice that thing and sell it off to people. So you weren't owning a mortgage from Joe Smith. They were saying you were the worst of them?

55:39And that's all the time we have for today. I mean, in all seriousness, I give a real generic stuff, because obviously, if you say something specific, it's going to be wrong, but in terms of people saying, what do we do, my general advice to people is try to get more income streams going, especially if someone just works for a company, don't just think, well, I better not get laid off or I'm dead, whatever it is, if you always want to start walking dogs on Saturdays,

57:09I think the economy is going to be bad in the midst of possibly very large price inflation. So like what would be a good thing? I wouldn't want to own a high-end jewelry store because no one's probably going to be buying fancy jewelry if unemployment is 20% because a lot of people can't afford it and then even rich people don't want to get mugged, right? So they don't want to be ostentatious in that kind of environment. But like low in- Paper and whiskey? There you go. But you also want income too. You want something that responds, that you and Research. So like lower middle class housing units I think would be something. If you could be a landlord and you owned that and you had a fixed rate mortgage so you could earn an income and if prices double in five years you could just raise your rents. I mean that's the kind of thing. Right, so that's what I'm saying. You don't want to get like this luxury

57:57apartment but people got to live somewhere, right? So I mean no matter what you do, there's There's always, if you buy gold, you say, well, they could confiscate the gold. Look, they did it in 1933. So no matter what you do, it's hard to put, but I'm just trying to think of, you want to have streams of income that come in that can respond quickly in case prices go up, but also industries or sectors that will do okay even if there's an awful, awful economy. So, yes. All right. With that happy thought, thanks everyone.