The Failure of "Stimulus" Policies

0:00I'm going to be talking about the failure of stimulus policies and this one before lunch. And specifically, I'm going to break it up into two things. I'm going to talk about first monetary stimulus and then fiscal stimulus. So that terminology, for those of you who don't know, monetary is what the name suggests. It means having the Federal Reserve somehow try to stimulate the economy, either through lowering interest rates conventionally the way it would be framed or now with this quantitative of Easing. That just means pumping more money into the system. So it's actually, let me just make sure you understand, those are actually just two different ways of describing the same philosophy, okay? So even years ago, like when Alan Greenspan was going to try to stimulate the economy, the press would say, oh, the Federal Reserve today lowered interest rates by 50 basis points or something, you know, from five down to 4.5 percent.

0:50The way that would happen is they would create money and inject it into the loan market, All right, so they would just create new dollars, add them to the supply of dollars, and so that would lower the price of borrowing money. All right, so that's, now with this quantitative easing, the real, the main difference in terms of the press reporting is now, since interest rates are already budding up against 0 percent, they're not talking about changes in the interest rate, they're talking about, well, how much money is actually now being dumped into the system, okay? But the two techniques were always the same, the way the Fed lowers interest rates is by The Theory of Money and Credit You understand there is a school of thought that thinks like this and if the Austrians are right Then what the Federal Reserve is doing now is the exact opposite thing it should be doing, right?

2:04It's just making it worse. It's setting us up for another bigger crash. Okay, so it's important to realize Because you might get the sense when you read like the financial press. It'll say stuff like You know despite the feds efforts at helping, you know, so far the economy is still luggish or you know The feds pumped in more medicine, but if the Austrians are right, you know The article should read, because the Fed has been doing so much, that's why the economy lingers in the recession. Or because of all the poison the Fed is pumping into the economy, that's why things are still so awful. I think the reporters there think they're being very neutral and they're not picking winners and losers and they're just not being ideological. But the very phrasing they use when they talk about what the Fed is doing betrays a belief in monetary stimulus.

2:52The Theory of Money and Credit This, his book, The Theory of Money and Credit that came out in 1912, that was the one that really laid out this Austrian theory of the business cycle that I'm going to summarize for you. And then his student, Hayek, who actually won the Nobel Prize in 74 for his work on what we now call Austrian business cycle theory. And his big book, his seminal work on that was Prices and Production, which came out in 31. 31. So Hayek, just historically, just to give you some context, Hayek was the guy that went toe-to-toe with John Maynard Keynes during the 30s about what should governments and central banks be doing to get us out of this great depression that's gripped the world.

3:51And obviously, Keynes won the argument, right? The Austrians think Keynes was wrong and Hayek was right, but in terms of what did governments and central banks end up doing and what did Professional Economists, which economist did they think won the day? They obviously picked Keynes over Hayek. Okay, so I don't know if you can see it with this podium in the way, but this quote from Hayek says, before we can even ask how things might go wrong, we must first explain how they could ever go right. and so that's what I'm going to do is walk you through the Austrian view of just a normal economy that's growing over time because I think we all know that when there are these crises, economies tend to grow and so just I want to walk you through the Austrian view of what specific, what regulates that or how does that all work out? You know, how is it that people build the right amount of factories so that output expands so that consumers when

4:50they go to the store, that stuff is just magically sitting there on the shelves, right? That's It's a very complicated thing, and there's not some central planner explaining, okay, we've got this much investment, so let's put it over here, and let's put it over here, and let's put it over here. It just sort of all happens spontaneously, and so I just want to walk you through the Austrian view of what in an actual market economy sort of coordinates all that complicated issue, and once you see how it works properly, Hayek's point is, once we see how it works, And then we can start to figure out what happens to make it get screwed up as we know it occasionally gets screwed up. Alright, so the main, the central point of this is that for the Austrians, prices act as signals and in particular, interest rates are certain prices and they coordinate things through time.

5:43And this is going to make more sense as I go through the presentation, but just keep In general, in the Austrian view, market prices mean something. It communicates information. It's a way that human beings communicate with each other. You can call someone on the phone, but also in the Austrian view, market prices act as signals. Just to give you an example that Hayek used to use, he would say suppose there's a copper mine in Africa that collapses. And so that the output of copper from that mine is interrupted for a few weeks while they're digging the mine out and getting the people and so forth. He said, well what happens, obviously speculators see that, they push up the price of copper. So in the world market, the price of copper immediately jumps up because there's an interruption in output.

6:33And so then what happens, every business around the world that uses copper sees the spot price jump up and they economize on it, they react to it, depending on their business. on their business. Some businesses, if they have a lot of substitutes, things they can use instead of copper, they'll switch out of it. They'll, you know, not buy as much copper and switch to something else. Businesses that, no, they need to use copper and whatever it is they're doing, nothing else will really work, well, they're going to still buy copper. So over the entire globe, because of that collapse in the copper mine, you have producers, everybody who uses copper around the world economizes on it, cuts back on how much copper

7:40The Austrian view of how prices help regulate things and why it is that you just take it for granted, you go to the store and there's all kinds of stuff on the shelves, when if When you think about it, that's a really complicated process, that everything that's on the store and the shelf took years to develop, took all sorts of tools, thousands, perhaps millions of people indirectly contributed to the production of that thing, and you just take it for granted. It's a very, it's almost jaw-dropping when you picture how complicated a modern global economy is, and the Austrian point is that prices help regulate that.

8:31So specifically, interest rates are themselves prices, the price of borrowing money, and and the Austrian say that their special function is they coordinate things over time, and we'll see that in a minute, but already you can see the Austrians here are different from most other schools of thought. So as an Austrian economist, when I'm writing an op-ed in the newspaper about, oh Bernanke, this is before interest rates got down to zero basically, but Bernanke was lower in interest rates, And I would write op-eds saying, no, look, interest rates mean something. The fact that with the collapse of Lehman Brothers and whatever, if interest rates on certain types of corporate commercial paper went up, that meant something. It was because people were panicked and now they weren't sure if these corporations were going to be able to pay them back. So that was a price that meant something.

9:20And the Fed's not doing anybody any favors by coming in and printing money and pushing those interest rates back down, you know, providing liquidity. That's not actually solving the problem. It wasn't that people were panicked because, oh, there's not enough dollars to go around. They were panicked because of some real news that came out, that, oh my gosh, did you guys make all these loans in the housing sector and now these people can't pay you back? That's why interest rates were going up. So that really means something, and all you're doing is deadening that signal. You're just preventing people from being able to communicate with each other if the Fed comes in and says, well, I don't like that interest rate. I'm going to push it down to zero. That's just falsifying the information that's trying to be conveyed okay so let me walk you through the sort of simplistic animation just to give you the general idea so again what I'm showing you right now is the Austrian view of how is it in a

10:09regular economy nothing special going on people save more that frees up resources for investment and that's how economic output is able to expand year

10:52So they disappeared here and they come down here. So the idea is the family has a certain income, it's spending less on going out to eat, and it's putting more in the bank. Okay, so their paycheck is the same, and the husband and wife just sit down and they say, I think we should really start saving up more, so we gotta, let's not go out to eat so much. So that's what happens from their point of view. Well, now what happens, the bank has more money to lend out because there's more savings, so the interest rate falls. In the grand scheme of things, what happened is the money that the family was originally The Austrian stress is that it's not just a mere matter of spending. There are real changes in the physical structure of the economy that gets set into motion because of these changes in where the dollars are going.

12:12So, specifically, in the first year, what I'm trying to show here, this sort of goofy picture is that fewer resources are going into this restaurant because people are spending less of them. So they actually have to lay workers off. They buy fewer hamburger buns and they don't open up a new chain, for example, because they're going to see their sales plummet, right? The people who own this restaurant are going to be thinking, oh man, business is awful because all these families stop going out to eat so much. So that frees up workers and raw materials. This is supposed to be iron ore. So I did a Google image search of that, but I realize you don't know what that looks like. So the point is, it's not just that the factory has more dollar bills, it's that there's actually more resources that are freed up. There's unemployed workers, right, that the restaurant The idea in the Austrian view is what the economy's scarce resources are going into got changed instead of channeling stuff into restaurants now that gets re-diverted

13:21and so more stuff is going into factories and making drill presses and 18-wheelers as opposed to making super value meals and plasma screen TVs. Okay, so, the idea is, that means in the next year now, there's more hammers, more equipment being made. Alright, obviously this is a stylized example, but the idea is, it's not just a question of every year, what's total output, as like a mainstream economist might talk about, and say, oh, did GDP go up this year or not? The Austrians break that down, and they say, no, it matters in terms of economic growth, what the economy's producing. If it's producing burgers and plasma screen TVs, well that's good. We'll take more of them. If Martians just showed up and started handing out plasma screen TVs, we'd be richer. That's true.

14:09But that wouldn't help us grow in the future. Whereas if the economy is cranking out this sort of stuff, well then that's real output today. So the GDP figure is higher. But what that means is workers are going to be more productive in the future because they have more tools to work with. and so then finally in year three now the restaurant can actually make more food even though it has fewer workers in it okay and the households have more money now so even if the household is saving a higher fraction of its income now its total income is higher than it was before and so it might actually be going out to eat you know they might get more restaurant meals now because they've The big picture here in case you got lost, just using a silly, stylized example, is that a household, if it starts saving, in the short term it cuts its consumption, you don't get to go out to eat as much, you start putting more money in the bank, but then that starts growing and your income starts going up because now you're not just getting your paycheck, you're also getting the interest you're earning off of your savings, and so after a while, even if you're still saving that higher fraction,

15:21The amount you get to go spend on fun stuff can actually be bigger. In the real world, it probably wouldn't catch up in year three, but I'm just doing the stylized example. All right, so you understand from your own personal finances how that works. That if you're really disciplined and you save a lot early on in your career, you know 20 years down the road, your income is going to be a lot higher than it otherwise would have been. And what I'm trying to get you to see here is the Austrians explain that it's not just a matter of dollars and cents. Physically speaking, how can it be that if everyone saves a lot, that down the road, we can all be richer, it's because the economy changes the composition of output. When people save more, that tends to lower interest rates, that leads to more investment, and it changes what it is that businesses produce.

16:07They start producing stuff like this instead of direct consumer goods, producing this instead of producing Ferraris, makes us, makes workers more productive down the road, Okay, so that's the basic Austrian story of how interest rates coordinate things through time. Let me just give you one little example of this because I know some of you are in business and this might crystallize it for you. Specifically, what happens, the Austrians say interest rates affect long-term projects more than short-term ones. So, if you are a, let's say you're a real estate developer and you're looking at this project, you say, okay, we can spend a million dollars, buy this little parcel of land, hire a construction team and build an apartment building.

17:05And I think if we rent out all the units with the going market rates that we project and so forth on net every year above our expenses of the utilities and property taxes and so forth, we'll pull in a hundred grand a year indefinitely, you know, after the maintenance costs and everything like that. So the question is, do we want to spend a million dollars upfront to acquire this property and build it and then earn a perpetual stream of a hundred thousand dollars in net revenue indefinitely going into the future? Well, if you know business, you know that's not enough information. You need to know what's the interest rate, right? Because if the interest rate's 15% and I could just put that in a bank, you know, earning 15% on a CD, I would be stupid to spend a million dollars to earn a stream of $100,000 payments because that's only a 10% return on my money and it's also risky.

17:54Whereas if the bank's only offering me 3%, well then maybe I do want to put my money in this project and earn 10% a year if my numbers are right. My numbers are right. Okay, so you see how interest rates there, the lower the interest rate that you earn elsewhere in the economy, the more like you are to do this particular project. Whereas if you're, let's say your neighbor has a big barn that he wants you to paint. And he says, hey, I'll give you $1,000 if you paint this thing. And so you've got to figure out, okay, well, how much paint would I have to buy? Would I hire someone to help me do it or would I do it myself? How many hours of my labor would it take? And you've got to figure out, is it worth it to take this project for $1,000? You're probably not going to say, well, wait a minute, what's the interest rate? Because you're going to knock that thing out in a week or two, your money's not going to be tied up.

18:41It doesn't really matter what the interest rate is. It's just a question of, is the $1,000 worth my expenses and my time? So the point with those two different examples, the idea is lowering interest rates This makes long-term projects appear more attractive, whereas it doesn't really stimulate short-term projects all that much one way or the other. So now, going back to the other example of the people, the households saving money, lowers interest rates, the factory borrows more and expands. What happens if the reason the interest rate dropped from 10% to 5%, what if it's not because is the families are cutting back on going out to eat, but what if it's just because the Fed creates money out of thin air and dumps it in the credit market? And that's why the interest rate dropped. Well then, you guys should say that blows up a bubble.

19:38So it's intuitively what happens is the Fed is messing up those signals. Back in the original example when everything worked out, when it was all coordinated, the families stopped the Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit

20:22The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit

20:52you have some sectors shrinking and other ones expanding so that they just develop more tools and over time they grow because of productivity increases under the artificial boom the Fed lowers interest rates starts throwing money around so to speak and everybody feels rich and everyone's spending more and so it looks like good times are here but that's physically unsustainable right because there's not more savings going around it can't possibly work that the restaurants start opening up new chains and, or new locations, while the factories are building more lines, if there's not more stuff to go around, there's not more savings, right, the Fed doesn't create more drill presses just by printing up dollar bills, okay, so that's the Austrian view that it's unsustainable, and because the modern economy is so complex, you can go a few years with this illusion of prosperity, but then ultimately something's got to give, okay, now, This story I'm telling you, a lot of people say, okay, that sounds nice in theory, but how do we know that what you guys are talking about is valid?

22:01Well, this doesn't prove it, of course, but let me just show you that Austrians did predict the housing bubble in progress. So here's a quote, higher interest rates should trigger, so someone talking about during the housing boom, you're saying at some point, Higher interest rates should trigger a reversal in the housing market and expose the fallacies of the new paradigm. This exposure will hurt homeowners and the larger problem could hit the American taxpayer, who could be forced to bail out the banks and government-sponsored mortgage guarantors. Okay, so that was Austrian economist Mark Thornton, who actually works in the same building as James down in Alabama there. And he said that back in June of 04. Green Span's Artificial Monetary Stimulus has sown the seeds of a contraction that will hit by Q2 of 08. The concerns of an asset bubble in real estate and to a lesser extent the stock market are entirely justified.

23:10So that's something that I said in a forecast for a bank, and I said that in July of 07. So I wasn't as prescient as Mark Thornton was. I didn't see the danger as early on as he did. But by July of 07, I was looking at things, and I realized, holy cow, the Fed has pumped up this bubble, and it's going to burst, and it's going to be bad. So this is showing that Austrian economists, using their theory, did see this coming before a lot of other economists did okay so just give you an example what made me come up with that what was one of the charts that I looked at that made me alarmed it was the green span had cut inflation adjusted rates to lows not seen since the 70s so this is the the federal funds rate that's the interest rate that banks charge each other for overnight loans that's not not a big deal what it is but it's the target interest rate that the Fed uses and this

24:04The word real just means I adjusted it for inflation, okay, so you see, so this is 01 right here, so this was right after the dot com crash and then the 9-11 attacks, Greenspan starts cutting interest rates way down, and so this is like negative 2%, so I'm saying here at this level, interest rates were like 1%, but the inflation rate was 3%. In terms of the purchasing power, if you let your money out, you got back negative two percent a year later. That's what this means here, once you take into account inflation. And so you see that it hadn't been that low since the late 70s. So the way I was analyzing it, as I was saying, Greenspan made capital artificially cheap to a level.

24:58He provided stimulus, so to speak, to a level we hadn't seen since back then. And of course, 8182 recession was awful. And so I wrote an article saying the worst recession in 25 years, question mark, with this graph, arguing in late 07 that I think that we're in store for what's going to be the worst recession in at least 25 years, again, using Austrian business cycle theory, just saying the amount of phony, low interest rate stimulus The question is, what do I see as the natural rate of interest? Do you mean, like, if the Fed weren't tinkering, what would it be? I don't really know, to be honest with you. And that's part of the problem why Austrians don't want there to be a central bank. We don't know.

25:56It's like if Castro asked me how many shopping malls would there be if there was a free market because I want to mimic that I don't know that you have to liberalize your economy and see what happens so I think they'd be higher than zero so I think people would charge someone to borrow their money if it weren't for the Fed doing what it's doing but I don't know what it would be and also I think you would see differences like treasury interest rates would probably still be lower than normal just because they're perceived as safe whereas I think certain corporate you know commercial the Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit

26:56The Federal Government in terms of its taxing and spending. So when you talk about fiscal stimulus, what people mean is the government either spending more and or taxing less. That's the way they're going to try to stimulate the economy. I don't have a problem with tax cuts per se, so when I say here that I'm going to be criticizing fiscal stimulus, what I mean is the government running deficits by borrowing and spending more money. And so there's clearly a presumption that that helps. And the issue was just, you know, do we want to run the debt? But most commentators, you read the financial press, see the guys on CNBC, just take it for granted that if the government borrows a billion dollars and spends it, that's good. And that the only danger is, well, gee, if they run the debt too much, but they just take it for granted that government spending money per se is good for the economy. So the obvious Austrian rebuttal of that is, wait a minute, it's not

27:53Creating More Resources The government just borrows a billion dollars from the private sector and spends it. It's not that that spending is manna from heaven. That came from the private sector. And so why is it that we assume if politicians are directing where resources go, that's more efficient than if people in the private sector are doing it, right, just as a prima facie case of leaving resources in the private sector. So that's sort of the intuitive response. Now it's just to give you some more empirical evidence of this Austrian view that well no, big government spending doesn't help an economy that's depressed. Some of you may have heard about this. This is taken from, so these things are added, but these blue curves in the with recovery plan without, this was taken from the program developed by Obama's economics team.

28:48So when Obama first came into office, January of, what was it, 2009, unemployment at that time was 7% in change. Okay, so this, I see, 2009, first quarter, they came in, unemployment had just broken 7% and it was obviously rising. So if you try to remember, think back, we were clearly in a recession, remember, it was in the September of 2008 when the world was ending and Paulson Bush's Treasury Secretary said, hey, I need $700 billion, the world's going to end. and uh and so that that was going on and then Obama comes into office and says hey we need this huge stimulus plan and first they asked for a trillion but then they backed off and it ended up being I think 787 billion was the official price tag so this this projection here was put out by Obama's team to sort of show Americans why we need this thing you know yeah it sounds like 780 billion dollars a lot of money but we need it because look if we put this recovery plan into place this stimulus package unemployment is going to keep

29:47Keep going up, don't get us wrong, but it's not going to break 8% and it's going to come back down. And they were warning Americans, they said, if we don't, if you don't let us borrow this $787 billion and spend it and ramp up the deficit like those Republican conservatives are telling you, you better be careful because unemployment might, it might even break 9%. So that's what they were warning Americans and saying, you don't want that, do you? So of course people said, oh no, we don't want that. So they passed the stimulus and what happened is unemployment broke 10% with the stimulus. So again, in case I lost some of you, unemployment went up much higher than the scary scenario the administration economists were warning people saying if you don't give us this big deficit spending package, unemployment left to its own devices might get a little bit above 9% down the road and that's so awful you can't imagine that, right?

30:36So let's let us borrow and spend this money to keep unemployment from breaking 8%. and of course unemployment went up much higher than that and it's it even went higher out of this I couldn't find a chart showing the the latest version yeah

31:10This is a pretty neat chart, but all it proves is that they have no credibility in projecting. It doesn't really speak to with or without a recovery plan, unless there's a source that's a little bit more credible with projecting. Well, let me put it, there are, well, let me put it this way, What I'm trying to show with this, though, is that the issue is not, aha, they called it wrong, what a bunch of idiots.

32:12My point is, what would the world look like if Keynesian stimulus deficit spending was a bad thing or were a bad thing? It would look like this, right? Because what happened in retrospect, it's not that Christina Romer, who was in charge of this team, She didn't say, oh my gosh, we made a mistake, we shouldn't have borrowed and spent that money. We made things worse because we took resources from the private sector and we spent it on government boondoggles. That's not what they said. They said, no, it still is good that we did that because the economy was worse than we realized. And so the way ex post, they justify the stimulus is they're going to say, yeah, we made a mistake, we admit, you know, nobody's perfect. The economy was worse than we realized. So in reality, since this red line was what really happened,

33:26You'll get this sick, but you'll start to recover. If we do nothing and just let this fester three months from now, you might be this sick, and then you go ahead and do it, and you end up sicker than he promised you, and even then when he said it would have happened if you did nothing, by itself, that doesn't mean he's wrong. He could just say, sorry, we misdiagnosed you up front three months ago. You had the cancer spread a lot more than we realized at the time, and it's a good thing we did the chemotherapy because you would be dead right now if we hadn't intervened when we did. This doesn't prove it, but my point is just to try to bolster the support for these sort of intuitive things I'm saying about government spending versus leaving resources in the private sector that the world looks just as it would look like if the Austrians were right going through all these debates. I'll give you some more examples.

34:16There are plenty of, you probably wouldn't realize this from reading the financial press, there are plenty of examples of countries that had bad economies and then their governments cut their spending and then the economies came out of it, right, even though that sounds heretical. The people say, no, that's crazy. Everybody knows the way a government helps an economy is to spend more money. But no, there's plenty of historical examples and this isn't stuff that the Heritage Foundation cooked up. This is coming from a European Central Bank analysis based on some papers out of Harvard and some other places, right? So this is mainstream stuff. I delved into this for an op-ed. The best example I could look at was Finland because unfortunately some of these countries, When they implemented what they call austerity, they cut their spending and they jacked up taxes in order to bring down their deficit.

35:02So there, it's not a clean test of what Eisenaustria would recommend the U.S. government does. But Finland was a pretty good one in terms of, if you want to call anything an experiment. So I'm just running through what happened with them. So from 93 to 97, their deficit averaged 5.2% of their economy. So their central government's deficit was that big. So that's pretty big. Just to give you an idea, under the first Bush administration, the deficit was like, the highest it got was like about 3.8% of U.S. GDP. So a lot of people say, George Bush cut taxes on rich people and started two wars, ramped the debt. Well, Finland's deficits were much bigger than under the first Bush administration. And then from 1998 to 2002, they implemented this austerity and they had government surpluses.

35:47So they were paying down their debt for these four years. for these four years. I'm just showing you there's a sharp turnaround. The year 1998 is when they flipped. So, 97 was the last year of deficits. 98 was the first year of surpluses. I'm just giving you, showing you the pattern here. That's a fairly significant change in their policy. And specifically, what they did is they cut their spending. So, in 97, their government spending was this size of their economy. In 1998, one year later, it dropped to that. So what happened is they cut their spending a little bit in terms of absolute numbers and then their economy grew so that as a share of their economy the government was taking much less. Okay, so that's a, if you don't know these numbers then this means nothing to you, but that's actually a huge drop for a one year change, right?

36:35In terms of, you know, when they're talking about right now in DC tinkering with budget projections to try to get the deficit under control. This is a huge, huge drop for one year in terms of how much is the government spending. And yet, this is what ended up happening. So 1997, Finland's unemployment rate was 12.7% and their economy grew about 2%. So in other words, their GDP growth was 2% that year. So you would think with these sort of savage budget cuts in terms of the Keynesian worldview, and look it, their unemployment rate was 12.7%, that's not a healthy economy. The last thing in the world you want to do is have this happen, that you're going to plunge yourself, unemployment's going to shoot up, you're going to go into recession, but no, one year later, when they implemented this, unemployment dropped, and their economy grew a lot faster than it did the previous year, okay, so again, there's countless, well not countless, there's several examples of unemployment in the last year.

37:39The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit

38:09and what examples are there if you say okay well do we have cases where governments ramped up their spending and that's how they got out of the doldrums and people will give some examples they'll give you the US under the first few years of FDR and I've already talked about why that was a little problematic they'll give you US during World War II and I've talked about why that's not really a great example and surprisingly they will cite our recent experience They will point to the Obama stimulus and say, that proves stimulus works. So that's why I went over that earlier chart, is I want to show you their mentality. That doesn't mean, whatever happens, they're always right, because they just ex post say, well gee, the economy was worse than we thought it was. Okay, so in their mind, the reason we just saw stimulus in action being successful, is they're saying, well no, we ran our models, and we think we saved or created 3 million jobs.

39:02And so you don't want, you want 3 million jobs to disappear? That's a good thing we had that stimulus. So the point is, their models, they always end up being right because the assumptions are built right into the model. That by definition, in the way their computer models work in their simulations, government spending per se creates jobs. Okay, so what I'm trying to get across here is that when you argue, when an Austrian is arguing with these mainstream Keynesian guys, The Keynesian guys think they're being really empirical even though like I say when you ask them, well give me examples of when your stuff has worked because I have plenty of examples when my policy works, they'll say stuff like that when in my book that's prima facie evidence that their policy failed miserably, that unemployment went up way higher than they said it would. Okay so that's the and what are we doing on time here? I guess maybe I'll take time for just one

39:52If there are two questions, then it's lunch time. What are the assets of Obama's group in terms of this around the natural cycle of things before the number of 2012 elections? You think he will? Well, if you didn't get it, you're going to be... You got to have a bunch of rough mechanics, and you'll be good as well. But I just have a theory about this guy, and I've heard it some time. Particularly, somehow, they used to rob him. Sure. Well, I was, yeah, before having just come off doing my depression book when people were asking about Obama. And this is when he first came in. Because he... I mean, I'll be honest.

40:37I wanted him to win over McCain just because I thought they were basically going to do the same stuff. and I don't want free market ideology getting blamed for all the crap that was going to happen right and so I was glad at least you know this is clear cut no we got a big government guy in there and so all this stuff is you know could be laid at his feet and also I thought if I have to listen to some guy talk for four years I'd rather listen to Obama than McCain but but now he's starting to annoy me so it's and I and I do think but I was thinking back then so this is when you know Obama was still really hot commodity and everything and I was telling and the economy was horrible under him. So don't just assume, like if they can just spin it and make it look like, well no, it's not my fault.

41:25It's those fat cats on Wall Street or whatever. So I think you're right. And if there's a terrorist attack three months before the election, people might just defer to whoever's in office because they don't want to change horses midstream. Who knows what's going to happen? So you are right, though, and that's the thing with these recoveries. I mean, if economies recover on their own, so even if people just sat back and did nothing, eventually you would get out of the recession. And so it's, but it's funny in terms of, and I say this not to be melodramatic, but I meant it literally, that if you would ask me five years ago, come up with a plan to absolutely cripple the U.S. economy and just leave it stagnant for ten years, I don't think I could have done a better job than they've done, right? You know, threatening Taxi, Healthcare, Cap and Trade, you can't drill offshore, but now you can, but now you can't, right, and I mean just all these things, and then with the Federal Reserve just creating

42:20trillions of dollars and loaning them out to people behind closed doors, I mean, so people are actually now literally afraid that the dollar might not be around in 10 years, and other countries are actually talking about getting rid of the, so what I'm saying, you're They're right, in general, if this had just been a run-of-the-mill housing bubble and collapse and the government had done nothing, it just would have recovered on its own. But with all the stuff they keep doing, they just keep perpetuating. And there's conspiracy theorists, of course, who say they're doing that on purpose. They want, in order for them to get more power, they need people to feel vulnerable and not know what the heck to do. People now are rushing into hedge funds several months ago because there's no interest, there's no yield anymore. What can I do? I want to give my money to these hedge funds. They're

43:34And just let things ride. You're right, I think by the election we'd start coming out of it. But so far, it's like every time things pick up, they just come up with some new thing. Okay, maybe one more question and then it'll be time for lunch. Anyone? This is maybe more monetary policy. I've heard Greenspan said that we didn't have inflation during his era, in the most recent era, because China was over-saving, something to that effect. Any comments on that?

44:28I did an article on that at Mises.org, I can send it to you later if you want, but there's a few problems, one of them is that the global savings rate was much higher during the 90s for a certain stretch than it was during the housing bubble years, so if the idea is the world is just saving too much and that's why interest rates got pushed down here and Greenspan had nothing to do with it, it's just the numbers don't add up. In other words, why didn't it happen earlier? If you look at mortgage rates, they were going down. If the international savings story were correct, you would think that, okay, so mortgage rates came way down, that fueled our housing bubble, then mortgage rates started coming up, and that's when the bubble burst.

45:13That's one of the slides that I skipped there. Do I actually have that? Let me show you. Okay, yeah, this is why I skipped. Let me just show you this. So, this is a 30, the blue line is a 30-year mortgage rate, and this red line is the home price index, the yearly increase, so you can see, mortgage rates were, they peaked in 01, and then they came way down, just as Greenspan was doing all his stuff, and that's also when home prices, I mean this is here, at the peak, there was a period where home prices were going up at a 20% annualized rate, the index.

46:26in the market was because people in China are saving so much you would think that as it's falling here savings rates would be going up and then as it starts coming up their savings rates would be going down right that would be the explanation but no through this whole period throughout this whole period here the global savings rate went up so as our housing bubble boomed and then busted throughout that whole period global savings was increasing so to me and like I say global savings was higher in the 90s than it was during this period when it fueled the biggest housing bubble in U.S. history. So just the numbers and the directions don't really make sense to me. Yeah, if they had moved symmetrically and if global savings in this period were higher than they had been in 50 years, maybe it would make sense. But to me, just the numbers, the story doesn't really make sense. Intuitively, that's bad because people are saving more. That doesn't make any sense to me. Our economy was brought

47:21to its needs because people are saving and lending us too much money.