Episode Transcript
Speaker 0 00:00:00 All right. Well, um, we are going to get started. This is one I've been looking forward to for quite a while. Uh, hello everyone. My name is Jennifer Andrew Grossman. Feel free to call me JAG. I am the CEO of the Atlas society. I'm joined up here by, uh, my colleague Scott Schiff, as well as our founder, David Kelly. And of course our senior scholar, Richard Salzman professor at duke to talk about I essence causes. And so Richard, I'll, I'll hand it over to you, but I'd love to just maybe get a, a, a set on where we are right now with the inflation rate, uh, where it's been moving over the past few weeks and months and, um, and then dive in.
Speaker 1 00:00:55 Good. Thank you very, very much, Jennifer. Thanks. Uh, thanks for joining David Scott and others. Um, this is, uh, really, uh, first of two parts in two weeks, I'm gonna do recessions. So we're experiencing both now inflation and recession. Uh, so I thought I would devote these two clubhouses to it. And earlier clubhouse I did, um, on price controls. So that'll come up today a little bit, but the focus will be on inflation. Now in the headlines, if you will, Jennifer asked what what's in the headlines, the, the general price level in the us measured as the consumer price index has gone up roughly eight to 9% over the past year. That is the fastest rate in 40 years. So it's the fastest rate since Jimmy Carter and what happened after Carter Reagan and the supply signers came in and fixed the situation, improved the value of the dollar.
Speaker 1 00:01:46 And we haven't really seen high inflation since then. So this is in many ways they returned to 1970 style us, uh, policy, which I'll talk about, uh, in a moment, uh, in the Q and a, I suppose we can devote more time to whether what's around the corner for inflation. Is it gonna get worse, uh, or not? And why, and what are the policy responses likely to be? They, they, we're already seeing that. Uh, thank you, Jennifer, for linking to, uh, this is an essay I wrote. I think it's a couple years old now, the production of money isn't necessarily the production of wealth. So that's at American Institute for economic research and I write for them frequently and there's probably, uh, two or three essays there on inflation, including how they affect stocks and bonds. So take a look at that website, just search Salzman at a I E R.
Speaker 1 00:02:35 Now what I thought I would do for 20, 25 minutes or so, and then open it up for comments and questions is, uh, four things, really one, what is inflation two? How do you measure it? Three? What causes it four? What cures? It, that's basically my mission. What is it, how to measure it? What causes it and how to cure it. And throughout that, I'll talk about, uh, one of the big topics will be the deleterious effects of, uh, inflation. Now, before I proceed. And before I forget, let me give you some other really great sources in the literature, if you will, of free markets and, um, not to boast, but my own book, gold and Liberty, 1995, also available at a I R I think for free. Just go to a, I R it's there in PDF gold and Liberty has a lot on inflation and the history of the gold standard iron ran in 1974, wrote a fabulous essay called, uh, egalitarianism and inflation.
Speaker 1 00:03:38 And that was reprinted in philosophy who needs it. If you wanna look for that, the obviously Francisco's money speech from, uh, Atlas shrug is a more philosoph take on money. The role of money and inflation is a debasement of money. So you need to know what money is before. You know, what it means to debase it. Green spans essay in capitalism, the unknown ideal is also good gold and economic, uh, freedom. Number one, inflation is a decline in the purchasing power of money. Now I wanna pause there because there's so much bla about inflation, that you get a whole range of things and you can't keep track of what it is. You'll hear, you know, cuz you'll hear, uh, OPEC or greedy labored unions or big meat and they say big meat did it or so crazy. CRA just scores of, uh, alleged, uh, descriptions of causes of inflation.
Speaker 1 00:04:36 So to repeat inflation is a decline in the purchasing power of money. Now notice, I didn't say anything about prices and everyone thinks that what prices are growing up, where's your Def, where's the price definition in there? Well, the purchasing power of money is what money we'll buy in terms of real stuff. Uh, when you go shopping in the grocery store, you're exchanging pieces of money for goods and uh, if each piece is worth less and we could talk about how that happens, but if it declines, you're gonna have to offer more pieces per say, I don't know, low for bread. So the rising prices is the effect, not the cause. So this is already philosophical to mess up on inflation and many economists do part of it is they reverse causality. So you gotta get the causality, right? The identity of it is it's a decline in the purchasing power of money reflected in.
Speaker 1 00:05:33 You gotta use more pieces of each, uh, form of money to buy things. So the effect is rising prices. Now the other thing to distinguish English, rising prices for pretty much all things, this is not a, what economists call a micro phenomenon, a micro microeconomic phenomenon or industry specific or product specific. That'd be something like, uh, suppose money is sound and there's no broad, uh, price level increase. And you just see a crop failure. You know, there's just a failure in, I don't know, wheat production or something. So you would get an increase in the supply. In the price of wheat supply demand would tell you less supply, uh, same demand, all else equal. The price of wheat is gonna go up. That is not even, even Kasian mantras economists will not cause call that inflation. Inflation is supposed to be something broad based. And that actually gives you a hint that it has to do with money, not with any specific product because money exchanges against every product.
Speaker 1 00:06:37 Okay. And then of course, all prices don't go up the same, uh, way or at the same time. So in, uh, inflation, a decrease in the purchasing power of money, by the way, the flip side of it is deflation. If someone said, what is deflation, it's an increase in the purchasing power of money. Now let me just say something quickly and let me move now to, uh, I'm gonna get to what causes this, but let me just get to measurement cuz it concretizes it better. I've already talked about, uh, prices of things going up. Uh, so that's a kind of measure. Um, but the, a broad way of thinking about this is the cost of living. Everyone knows that expression, the cost of living, what it costs to live buying food, buying clothes, renting an apartment, buying gasoline. So that's called the cost of living.
Speaker 1 00:07:29 And when you get inflation, the cost of living goes up. The prices of a bunch of stuff goes up and all else equal. You do not want a rise in the cost of living. You want to decline in the cost of living different from living standards. You want rise in living standards, but you do wanna decline in the cost of living by the way, not just for consumers, businesses as well, want their cost to go down, cuz you're trying to maximize profit. So all I'll think, well they make money if uh, they can keep costs down. So this is a universal principle and, and that's another reason to oppose inflation and to welcome actually deflation, uh, economists think deflation is the devil, but deflation is a decline in the cost of living. Things become cheaper every year. How wonderful, not more expensive every year, cheaper every year.
Speaker 1 00:08:26 And that does tend to happen under capitalists though. We haven't seen that in a long time cuz we don't have capitalists. All right. Point two. How to measure it. The most common measure of inflation is by looking at the effect, not the cause. Uh, and I haven't got to the cause yet, but let me just look to these measures to give you a flavor CPI. When you hear the word I I'm, I'm keeping this somewhat basic for those who aren't familiar with the economic literature or the headlines, CPI means consumer price index. What is it? It it's a basket of goods. Uh, it changes over time, but it is supposed to roughly reflect the, uh, kinds of things, the quote average consumer buys. And so the basket is weighted by the things I mentioned earlier, things like food, clothing, housing, gasoline, transportation, stuff like that. And what economists do is every month they run around, they send people around and, and, and look at the prices of these things and then they record them.
Speaker 1 00:09:25 So if the consumer price index is going up, that's another way of saying generally prices are going up and that's the number I measure. I cited at the outset, the eight or 9% we're seeing now. Uh, it had been something I one or 2% a year for the most of the prior decades. And so eight or 9% a year is a lot. It's a big increase in the cost of, of living. You can also measure it against other things though, um, commodities, um, you can measure it against gold when you see the gold price rising substantially, uh, that is another sign that the dollar is worth less in terms of gold ounces. So the gold price under the gold standard. Last time we were on the gold standard, 1971, it was $35. Now, what is it today? If you look in the newspaper today, the gold price is $1,800.
Speaker 1 00:10:17 Roughly. How did it go from 35 to 1800? I mean, other than just more dollars are spent on each ounce of gold. But if you, if you look at the reciprocal, it's another way of saying, well, a dollar used to be worth one 35th, an ounce of gold. Now it's worth one 1800th. Announcable it's the dollar that's lost value. It's the paper dollar and what it can buy that has enormously shrunk in the last 50 years. Whereas gold has increased in value gold, the long term historical money that welfare status despised has held its value and increased its value over this time. So even though major governments are not on the gold standard, uh, it is not as if the gold value collapsed. So that's another way to measure this over time. And that is an enormous decline over time in the purchasing power of the dollar, the eight or 9% we've seen over the past year is just one year.
Speaker 1 00:11:18 Okay. Now, if inflation is a decline in the purchasing power of money and the purchasing power of money is what a dollar buys I'm gonna use the dollar here, not foreign currencies, just for ease of conversation, what causes it? The answer is supply and demand of that's an answer. That's an answer. Any economist could give for any price. Why, why did the price of shoes go up or down supply and demand, supply and demand? Well, but if this is still valuable because it applies to money and this is very complicated and very abstract people can't think of this as easily as shoes or wheat or gasoline. People generally do know what the supply and demand law is. All something like this, all else equal more supply, brings down price, all else equal less demand for something brings down price. And then the reverse all of less supply, higher priced, all else equal more demand, uh, uh, higher price.
Speaker 1 00:12:20 I hope I said that correctly. Now there is money supply and money demand. Most people are familiar with the money supply. The numbers are actually, uh, published and you can find them on the federal reserve site, by the way, if anyone wants to be a number cruncher here, if you just put in Fred data, Fred is in Fred Flinstone. Fred stands for, I don't know, some kind of federal reserve thing, but it's at the St Louis thing. If you just put in Fred data, it'll bring you to a site and then under search, just put M two, that's it? No space, M two and you'll get a chart of the money supply. So the, in the us, the money supply, uh, is a checking accounts plus currency. Basically, there's also some savings accounts in there, but that is basically what the money supply is defined as now.
Speaker 1 00:13:10 What is money? Demand? Money demand is how much cash you hold in your bank account and in your wallet. Now that's a more abstract than when people think of demand. It's not demand for money in the sense of, Hey, I'd like a higher income that's income. No we're talking about cash balance. It's literally cash balances. And if you think of this, now, try to work this through. If you do not trust the value of money, if you think it's losing value, you'll try to get rid of it faster. You will try to spend it out of your wallet in your account and buy real stuff faster. That's called the velocity of money because you expect the prices stuff to go up. On the other hand, if you'd the other way around, what would you think prices will decline? Then you would wanna wait to buy stuff, right?
Speaker 1 00:13:59 And if you're really scared, here's another factor for demand. If you're really scared about things, if there's a financial crisis going on, or if you lost your job, or if it was hard to suddenly to get loans from a bank, you would hoard your money. So hoarding, it's not a, not a dirty word. Hoarding is just an extreme demand for money. And that increases the demand for money. Well, bottom line here is you can look at the purchasing power of money as an interplay between the supply and demand for money. But the biggest factor is the supply. Meaning the reason the value of money goes down. The reason the purchasing power of money goes down. In other words, the reason behind inflation is primarily an excessive increase in the supply of money. An excessive increase in the supply of money, excessive meaning in excess of what people wanna hold.
Speaker 1 00:14:55 Uh, if the shoe producers did this, if they looked out at the world and said, oh, look at that demand for shoes, but to hell with it, we're gonna make three times as many shoes as last year. That would be crazy, right? Cuz the supply shoes would plummet. They wouldn't make any money. So they have to calibrate to make money. They have to calibrate their supply to the demand. The government does not do that. And this is now an important issue. The supply and demand of money could be analyzed that way in any monetary system, including free banking in the gold standard, which is the capitalist system. Suppose there was no government involvement in money. Suppose the private sector alone provided money in banking services. You would still have this mechanism of supply and demand. Uh, it doesn't, uh, it's, it's ubiquitous and it's under every system.
Speaker 1 00:15:44 The question is under, uh, free market system. The supply is the supply of money issued in excess. No it is not. It's issued in accordance with demand as every other product is, but that's not true when government takes over co-ops the monetary system. So, and this is a good time now to say, because now we're in the field here of what causes inflation. Um, the main cause of inflation, I would say since at least the last 50 years, but you could go further back. But the reason I picked the last 50 year, actually 51 now is in 1971, all the governments of the world, uh, instigated by the United States went off the gold standard. There has not been a link of any currency convertible into gold or related to gold, which again was the long term historical monetary standard. None of them have been on it for 51 years.
Speaker 1 00:16:40 And that's uh, from my calculation is the longest stretch of time of call it Fiat paper money backed by any tangible thing. Um, for centuries, um, from nine from 17, 14 to 1914, that's 200 years, Britain and America were largely on the gold standard. Uh, not to get too much in history here. Uh, the last hundred years have been like an on or off thing with the gold standard. It was on, uh, and then off in 1933 under the grade depression and they went back on it, then they went off it in 1971. Now they're completely off it here. We I'll get into that more. Uh, if you wish in the Q and a, but here, I just wanna say what the sequence of causality is.
Speaker 1 00:17:31 The main reason we have central banking is not so central banks can fight inflation or smooth the business cycle or make sure banks are safe or prevent financial crises. All the things you hear, uh, that economists claim central banks that none of that is true. Central banks exist to fund the government. They're special favored monopoly, issuers of Fiat money in pay to the government in total duty to the government in cohorts with treasury and finance ministries. So they no longer unlike in a free banking system, they do not issue money related to economic activity. They issue money related to government spending activity. And there's a bad feedback loop here. Once the government gets involved in money and it's motive is to be able to print it virtually without limit. It also takes away any check on government doing that. So a government that wants to engage in deficit spending, which means spending more money than they take in, in tax revenues.
Speaker 1 00:18:40 Uh, that is an ingenious combination. When you think about it electorally, right? So politician stands up and says, I'm gonna spend more money. Yay. Everyone votes for him. Uh, but I'm not gonna raise taxes. I might even cut taxes. Yay, cut taxes. Of course. The difference is you're not gonna be able to take in the revenues needed to pay for the spending. You get elected, but there's a gap there, right? There's gonna be a gap between the amount of spending as the welfare state expands and taxes. Well, what's the difference? How can the difference be made up the government either has to borrow the money and, or print the money. And that is what the central bank facilitates that is predominantly what every, not just the us, every central bank is pretty much in the business of facilitating this process by which call it propagate government, uh, fund their excess spending, uh, without taxing the citizen really and getting thrown out of office. So the citizenry don't feel if you will, they don't feel the full pinch of the higher government spending they're voting for.
Speaker 1 00:19:49 Why? Because when they, because the effects of inflation is to raise the price of stuff, gas, food, clothing, and they look out and they say a gas station. Did it, the clothing air did it. My, uh, landlord did it. You see, they say, they're looking at the effect. They're not gonna sit around and say, dad, Jerome Powell did it. That's the fed head. That's the head of the fact. Um, some people go there, but it's a very abstract thing. It's hard to trace for most people. It's hard to trace the, the sequencing. Um, now even if, and this did happen by the way between oh eight and very recently, imagine now even if, if federal reserve or any central bank massively increases the money supply, which by the way it did from 2008 to in the five or six years after that, you would not necessarily see a higher inflation.
Speaker 1 00:20:41 If what if you get your supply demand stuff down straight. If the demand for money also went up, you know, Perry pursue with the increase in the supply of money and that did happen. But what does that mean? Think of what that means, think of what it means that the government would massively increase the money supply and companies and households and individuals would hold. It would hoard. It would sit on. It would be very, would not spend it. That would mean that the demand is keeping pace with the supply, but it's not a very good picture because, uh, hoarding money is a sign of fear. It's not a fi it's not a sign of confidence. It's not a sign of, Hey, I think I'll take my money and start a new business. Hey, I think I'll take my money and invest in stocks and bonds, or take a flyer on, uh, some new product.
Speaker 1 00:21:29 It's a, it's a fear based, uh, kind of worrisome outlook for people. And, uh, but that just, I mentioned it only to, uh, solve the mystery for some people. Well, how can a money supply being going up say 20% in one year? Uh, but prices aren't the answer is cuz the demand for money went up 20%. Well, what are we finding now? Now we're finding that inflation is going up rapidly. And if you look at the money supply, it has gone up significantly, especially since 2008. But that the pattern, since I would say really since, um, Y two K if you're old enough to remember Y2K, that was the turn of the century. And there was a fear that all the, uh, ATMs would crash and all the computers would stop and all the lights would go out. And, and that was the first time the federal reserve, uh, massively increased the money supply out of fear and there was no need for it.
Speaker 1 00:22:25 Uh, but then they also increased the money supply massively guess when after nine 11 and then they massively increase the money supply against guess when during the 2008 financial crisis and they massively increase the money supply yet again, guess when during the COVID lockdown. So we've had, is that four cases in the last two decades, we've had four by the way, wars have gone on as well. Wards are always sources of government just printing money without limit. Um, uh, but for there are four or five examples just in the last 20 years of cases where, um, it was not necessary to do this, but a panicking central bank, uh, increased the money supply at a fear and never took the money supply back. Never, never, uh, lowered the money supply after increasing and significantly. Okay. Now I wanna, I wanna say something before I go to deleterious effects and then I'll quit.
Speaker 1 00:23:20 Um, there's an important distinction to be made between, uh, when you get to supply demand issues, something called the monetary standard. This is very important to a sound objective capitalist based money system. It's, it's very relevant to the gold standard and how it works. So the idea of a standard, uh, notice in philosophy and objectiveism life is the standard of value, which means it uses this is a gauge for deciding right behavior, right? So it's a guidepost, it's a, a kind of a fit it's definitely fixed. Life is conditional, right life or death, black and white. So a standard is not some rubbery flexible thing. It's a fixed thing. Now in monetary issues and measurement issues is some kind called the Nuer error. That's a French word Nuer or, or an example would be a yard stick, a yard stick equals three feet. Now that's an example of a standard.
Speaker 1 00:24:14 Now notice the yard stick is three feet. Every hour of every day, it's always three feet or what, what is a pound 16 ounces or what's a mile five. I think it's 5,000, 28 feet. These things don't change every day. That's what a monetary standard is. And that's what the gold standard was. It was like a yard stick, the currencies of the world, not just the dollar, but the British pound, for example, why do they call it the pound? Cuz it was a pound Sterling. It was a, it was a weight of Sterling of silver. So in the us constitution, by the way, the weights and measures clause, which is really the government saying you cannot defraud people by selling 'em stuff. Uh, other than how you describe it, that's where the monetary provision is. So the founders knew that proper money is standard money.
Speaker 1 00:25:03 And of course they said, don't make anything other than gold, silver, a tender and payment. So gold, the gold standard is in the us constitution. Uh, the reason I mention this is notice that the value of a yard stick say at a lumber lumber yard, it does not fluctuate with the identity. It fluctuates with the supply and demand of the yard sticks, but its value is held because it's always three feet. And when the dollar was defined as a fixed weight of gold, it had that principle. And as a result, there was no other than when government manipulated the standard. The history of the gold standard is neither inflation nor deflation. It's amazing. I mean over long periods of time, I don't mean day to day. In other words, and economists have measured that when you go back and look over these long periods of time, the longest study done, I think was from, uh, 16, 50 to 1900.
Speaker 1 00:25:57 Um, the purchasing power of currencies when they are convertible into gold and silver are very steady and that's a really important property because you want money to hold its value, to be a reliable yard stick for the prices we pay for everything that's completely lost when governments go off the gold stamp. And as I've already said, they go off the gold center because they need to print money, uh, beyond the money they're raising taxes. So keep that distinction in mind, once you have a monetary standard, um, you can issue more of the thing without it losing its value because it's credible. Now a quick history, the Roman empire fell in large part because there was a big inflation at the end. Now there were other reasons there's a big philosophy behind this, obviously, but from an economist standpoint, there are many cases where when inflation takes hold and accelerates, it causes enormous political instability.
Speaker 1 00:26:55 Um, and the most famous of course of the German hyper inflation, 1923 hyper inflation, you get thousands of percent increases in prices, uh, every day or every hour. Uh, the greenbacks during, uh, the us civil war was a case of hyperinflation in the us, the Continentals, which were printed, uh, during the us revolutionary war in, in France, the AIG NAS, which were, uh, printed after the revolution, 17 89, 17 96, Latin America, almost all of them had big inflations in the seventies. And of course the us did after it went off the gold standard in 1971 from 1971 to 81, the gold price went from 35 to eight 50 and the dollar enormously lost its value. Now some of the delete spec, then I'll end with, uh, a little bit on philosophy. Well obviously deleterious effects, higher inflation, a higher cost of living. It's just harder to live.
Speaker 1 00:27:47 It's just harder to buy stuff. Uh, people, unfixed income get absolutely ruined. What, what do I mean by fixed incomes, uh, older people who get annuities or, uh, pension plans and they can't get higher income while prices are rising. So they're just crushed. Whereas people who are at work and getting price increases, you know, tied to inflation are less affected by it, but it absolutely ruins people, uh, who are on fixed incomes. It ruined bond prices and hurts stock prices. When you see the stock market going down this year, uh, that is in part a, a caused by inflation. So your investment portfolio goes down now, tangibles usually go up. So usually, uh, commodities, gold, precious metals, art, your house, real estate, tangible things usually go up in value, uh, during inflation, the other, uh, couple of things, deleterious about inflation, uh, massive uncertainty, uh, not only when prices rise a lot, it's, there's a greater variation in what the prices will be.
Speaker 1 00:28:49 They start fluctuating all over the place, which makes it harder to plan both personal finances and uh, business, um, in interest rates go up, uh, there's a technical reason for this, but all else interest rates tend to go up. That's a cost of doing business, certainly borrowing all sorts of things, uh, under inflation. Uh, there's a risk of price controls. That is absolutely deadly if, uh, price controls. When you think about it, it is trying to, uh, cap the effect, not the cause. It's trying to stop by mandate prices from going up. But prices, we said are the consequence of the value of money going down, not the cause. Uh, but price controls cause shortages, they cause dislocations. They cause disruptions. And if the government gets more invasive about it, it actually starts, you know, throwing people in jail for, or finding them, you know, for daring to raise prices or wages, uh, amidst the, uh, edicts.
Speaker 1 00:29:49 Uh, uh, so those are just some of the things in Iran's excellent essay, egalitarianism and inflation. There's a very, very good discussion of how it, but you can get this in some economics too, but she's got the philosophy of it. It absolutely erodes the desire to save it erodes the desire to invest inflation, eats away and erodes at those things. But those are the sources of capital accumulation. Those are sources of, uh, productivity gains. Those are the sources of higher standards of living. So you cut out the pillars of all that. You get a, a stagnating economy, a slowing in growth, um, poverty, all sorts of things. So, uh, time horizons shrink enormously, uh, when the prices of things are going up, there's less long range, uh, horizons. There's a, there's a joke that under the hyperinflations in, uh, I think it was Bolivia. Someone said now, should I take a taxi across town?
Speaker 1 00:30:51 Or should I take the bus? And of course the difference is the taxi you pay at the end of the trip and the bus at the beginning. So the, the value of money would fall so much in 30 minutes that people would do those kind of calculations. And of course, there's a lot of standing in line and trying to, to buy things before the price goes up. If you know, in epistemology, there is a concept called nominalism, which is that concepts don't relate to anything in reality. They're just names and the kind of money we have today. And the kind of system we have today could be described as monetary nominalism governments, just print money, and, uh, don't claim that it's tied to anything that it means anything that it's convertible into anything. There is no objective money out there anymore. It's monetary nominalism. Um, and so it's a move away from objectivity really and away from realism.
Speaker 1 00:31:47 The other philosoph angle I'd name, which I think I already suggested is completely reversing causality. In fact, what gives money value? You can't eat this stuff. I mean, you can't even eat gold. What gives money? Its value is the creation of wealth. So wealth makes money valuable. Well, if you reverse the causality, you might think, Hey, I can just print money and get wealth. And that's the Kasian prescription. I mean, that is in route sometimes the monetarist through Friedman type prescription as well, cause Friedman was against the gold standard and for central banking. So, so both the monetarists and the Kasians are responsible in part for the terrible monetary system we have today. Um, but that be aware of that as well. This idea that, uh, people think, um, since money that, that Mon that the creation of money can somehow make an economy or a nation more prosperous, uh, not true.
Speaker 1 00:32:46 So for there, I would go back to the link of the essay, uh, that Jennifer had put up that I wrote about the production of money. Isn't the production of wealth. There's a chart in there that will shock you because you'll see that. I think I anchored it in 1959, there are three lines plotted. And the one that goes up the most is prices, uh, broad based prices. And the one that next goes up most is the money supply. And the line that goes up lease is actual production. And I say in that essay now, what would you rather have production going up more than prices and money supply? Yeah. And I think the answer would be yes, but the system we have today is the reverse. So I'll stop there and, uh, take comments and questions.
Speaker 0 00:33:31 Great. Um, I would also love to invite all of you in the room. Please share this room, use that share button down below, share it on clubhouse, share it on social media. It would be awesome to, uh, get some more people in the room for this discussion, uh, Lawrence. Oh, and also before I go to Lawrence, I wanted to, um, David you're up here and always give you the first place. So I don't know if you had something that you wanted to, uh, reflect on what Richard had to say. Uh, and I also wanted to recognize that we have our other senior scholars, professor Steven Hicks and professor Jason Hill in the room. So this is gonna be great, David.
Speaker 2 00:34:16 Thanks Jack. I'm I'm gonna hold off for now. I've got a couple questions. Um, but I imagine they'll come out and, um, they're um, I'd rather much rather hear what some of them were people more knowledgeable about economics than I am, uh, raise. Uh, so I'm, I'll mute for now. Thanks.
Speaker 0 00:34:37 All right. Thanks Lawrence.
Speaker 3 00:34:40 Thank you. Hi Richard. So, uh, my question, I'm sure you've, uh, probably seen already there was, uh, this announcement by a bank of America regarding, uh, no down payment mortgages for, uh, specific, uh, uh, groups of, of individuals in places like Miami, Los Angeles, Dallas, and now, while the fed has always been printing money in a, at the sort of national level, I, I was curious to hear which you would've to say about banks making sort of these more risky decisions where normal safeguards to judge, whether someone could, can, or should buy a house are thrown by the wayside for what seems to be equity measures. And I'm curious how you think this is gonna shake things up and maybe cause, you know, supply and demand to get all messed up.
Speaker 1 00:35:35 Well, thank you for that, Lauren. It isn't directly related to inflation, but I would say that, uh, and this is what you are describing is similar to what happened prior to the oh eight crisis with mortgages. It, it is true that under a system of central banking and unlimited money creation that you get bad banking, you get by bad banking. I mean, reckless and not profit oriented, cuz the things you're describing are that, you know, no money down is a risky mortgage and that was done in prior to oh eight, you know, and the idea that everyone should know to home, even if they can't afford it, a very altruist standard, um, the American dream was not, uh, everyone gets a house no matter what, but you worked hard, you saved money and then you got a house. Uh, so, um, all the accruments of central banking, including the two big tofa doctrine, the, the there's a doctrine that says that the banks are too big.
Speaker 1 00:36:33 They will be bailed out by the government. So that promotes reckless banking. The deposit insurance government provides deposit insurance. So people won't for, for almost nothing so that people won't run the banks, uh, running a bank is actually a thing that keeps banks honest, keeps them liquid, keeps them conservative. So we've had that since 1934, it's well established that government deposit insurance makes bank hold less capital and become more reckless. Um, there's various other things I could name other, you know, with government just like mandating that BI banks lend certain ways. But, um, the, the phenomenon you're talking about, I actually wrote about in 19 long time ago, 1990, I wrote a book called breaking the banks, central banking problems and free banking solutions. And the point was that banking crises and banking, weakness and banking recklessness is not due to the profit motive in banking. It's not due to any free market fault, uh, of banking, which is very common today. You know, anytime there's a financial crisis on wall street or elsewhere, they blame it on banks on greed, on the profit motive on deregulation effectively on capitalism. But actually these are due to government involving itself more and more in the monetary system and therefore the banking systems.
Speaker 0 00:37:55 Sorry, James,
Speaker 4 00:38:00 Thank you. Um, Dr. Salzman in, in terms of trying to understand why does the increase of the money supply necessarily result in, in prices going up? Uh, is there any kind of very simple example that, that you can give us that would help us to understand why that there's a causal mechanism there?
Speaker 1 00:38:30 Sure. Well, first of all, it's not James. It's not, I hope I'd stress this necessary, uh, that the money supply increase translates directly into price increases. And the reason is it's supply and demand. It's not just supply. So if the supply of money goes up 10%, say as an example, but the demand for money. And I define that as holding cash balances also goes up 10%, the two are offsetting each other in effect, and you would not get a decline in the purchasing power of money. You would not get a broad increase in the price index, but now, and in the case you ask, uh, well, what about the case where the money supply goes up 10% say, and there isn't any change in demand. What is the actual mechanism? When more money is created? Each piece is worthless. That's really the essence of it.
Speaker 1 00:39:21 But, but to Ize this, this is true of any good. It would be true. As I said, of shoe or of, of loaves of bread, all else equal. If you produce more of these things, they're going to be worth less and worth less. When it comes to money means you have to put up more pieces of paper, units of the money, so to speak, to get the good you want. Well, that is what prices are. Instead of paying $1 one month. You now pay $2. Why? Cause each dollar's worth less. So that's, uh, that's the best way I can put it in terms of concrete.
Speaker 5 00:40:02 All right. I hope that was helpful. Yes.
Speaker 6 00:40:04 Thank you. Thank you, doctor.
Speaker 1 00:40:07 You're welcome. Okay,
Speaker 5 00:40:09 Clark.
Speaker 6 00:40:11 Yes, Richard, thanks so much for this great presentation, but my question would be, um, if we take a walk down memory lane, let's say 40 years ago, how much of our current prices, you know, the 30 trillion, I think it's 30. Yeah. 30 trillion in counting and our unfunded liabilities. How much of that? Doesn't go back 40 years ago to the, um, essentially the deficits don't matter, Republicans. Um, and you know, of course I, I know art lapper and, and I mean, I know he, he didn't intend us, uh, where, I mean, his point of course, is that, you know, when taxes are too high and of course they were, they always are. But if you actually cut taxes at some point, you're actually gonna increase government revenue. And of course that's a, a very solid, uh, you know, proposition, but it got translated by, I guess, Republican politicians who maybe weren't very familiar with Macy's and Hayek and you know, the other three marketers, it got translated to like, Hey, I'm for I'm for cutting taxes. So I don't have to show you how I'm gonna balance the budget. And that's kind of, we kind of living in the shadow of, of, you know, the lapper curve and temp Roth. And here we are 40 years later and it seems like, I mean, too many Republicans just don't care about the red ink. And so what I know, you know, what are your thoughts about, about
Speaker 1 00:41:33 That? Well, that's a good question and it brings up other issues of what doesn't cause inflation, but let me just quickly say, cuz I'm a supply sider, but a balanced budget guy as well. The, the, the insight and the truth of the supply siders to their great credit was they rejected both the Kasians who would print money without limit with if they were and the monetarists and Friedman who said, uh, increase the money supply, you know, three to 5% a year. The supply saters were the only ones in the last 50 years to advocate a gold based money. Now it wasn't a full gold standard because they knew they couldn't get a good, a gold standard. But Reagan for example, was for the gold standard and he tr and laugher and others were trying to get Reagan to go back on the gold standard in 1981, he was talked out of it by Greenspan and Friedman.
Speaker 1 00:42:21 So Greenspan and Friedman, opposed going back on the gold standard, uh, under the gold commission of 1982. But you, but you're confirming a point a made earlier that when the Democrats step up and say, we're gonna spend more, but we're not gonna tax. And the Republicans step up and say, we're gonna cut taxes. It it's true that both parties in effect, when you think about it are contributing to wider budget deficits, they're contributing to deficit spending, therefore they're contributing to government borrowing going up. And the last sequence in that is they turn to the federal reserve and tell the federal reserve to buy the bonds. So that's, uh, that's if you don't know the that's, what people call QE quantitative easing that's that's debt monetization, that's the central bank, literally printing money and taking the bonds and giving the, and crediting the treasury account with money.
Speaker 1 00:43:14 It is literally creating money outta thin air, which is so why it causes inflation. Uh, but it, but I, I do wanna stress this point, Clark, if you hear someone say, well, we have inflation cuz the government's spending too much money. That's not technically true, it's it that's relevant only if it leads to an increase in the money supply and the same, same thing as true as deficit spending and debt issuance. If the government borrowed everything in order to meet the gap and didn't print money, there wouldn't be inflation. So it really comes down to what is causing the money supply to go up. And it's not that government spending doesn't sometimes lead to that, uh, or that borrowing doesn't, but spending and borrowing per se are not the cause of inflation and notice we had a massive government spending and borrowing up until a year ago and there was no inflation, uh, and there was a decent increase in the money supply. You need a combination of the money. Supply goes up a lot and people don't wanna hold it anymore. They don't trust it anymore. They don't demand it anymore. But I, you can tell, I have a mixed, I have mixed feelings about the supply siders, cause I think they did a lot of good and they certainly brought down inflation in the 1980s and revived the American American economy. But um, yes, they almost never say restrain government spending. They almost always say cut taxes. So it's a lopsided policy prescription.
Speaker 0 00:44:44 Great. Thank you. Uh, John, so good to see you in the room, dear.
Speaker 7 00:44:50 Thank you. Um, Richard, excellent presentation.
Speaker 1 00:44:55 Thanks John. And,
Speaker 7 00:44:56 Uh, it is focused on inflation. Yeah. As that is the current in the news hot item, but I'd like to, uh, mention, uh, de deflation and productivity increases. Yeah. And um, if we had productivity increases of sufficient size magnitude weight, then there would be no inflation, no matter almost no matter how much money they printed that is if increases in productivity or balance with the money supply, then you don't have inflation. The other aspect of that is no one in this room has ever experienced general deflation in the economy. The last time we saw that was in the evil era of the Robert barons, 1870s through, I don't know, maybe 1910, uh, when there was consistent every year, month, over month decreases in prices where the consumer would walk into a hardware store needing something and think, you know, if I wait until the next train comes in, the price of nails will drop.
Speaker 7 00:46:08 Um, and that, that if you ha, if consumers across the board have that attitude, it makes for very competitive markets at every level. And, um, that is partly why it's so difficult for people to understand the origins of inflation today. The only thing close to it was Silicon valley in the eighties, you know, or nineties when the price of computing was dropped and that caused an increase in productivity, um, generally, but it also, some of that was fake in the sense that now it was easier to hand a telephone call off to a telephone queue instead of having a smart secretary handle the call and route it correctly. So, and yes, computerization was deflationary, but in a narrow sense, I'll leave it at that.
Speaker 1 00:47:07 Yeah. Uh, thank you, John. Uh, I I'm, as I said at the outset, I'm reluctant and I resist referring to specific products or sectors like computing or things like that to explain, uh, inflation or deflation, because it's a purely monetary phenomenon. Uh, but I do endorse your view that deflation should not be a boogeyman the way economists have, uh, treated it, uh, by the way, the fed federal reserve has a target claims. It has a target, uh, inflation rate of two or three per, uh, 2%. Of course it's exceeded that, but I'm against even the target. Well I'm against central banking generally, but even if I was for central banking, why would a central bank promise to increase the cost of living every year? It's ridiculous
Speaker 7 00:47:54 Allow to interrupt
Speaker 1 00:47:55 Under, under a, uh, gold standard. And it was true under the gold standard. As you mentioned, the 1870 to world war I period, that was the classical gold standard. Yes, it is true that when there's free bank, there was no central bank. Then we didn't have that until 1913. So free banking and the gold standard I've shown, uh, from, uh, the period 1865 to nine, about 50 years delivered steady money and delivered, uh, steadily declining, sometimes fast declining prices, but didn't cause, um, problems. Because when you think about it, if you're a businessman and the prices you are receiving go down, it doesn't mean you shut the doors, cuz your cost could be going down. In fact, your cost would be going down cause costs are just prices. They're just the prices you pay for the stuff you're selling. So the key in business is profit margin.
Speaker 1 00:48:44 The key in business, the motivator is profits. And that's the difference between the prices you sell at and the prices you pay for the cost of good sold. So if the entire price structure is coming down, you can still make money and you will still expand your production. That's exactly what happened in that period. The, the, the period, the period you missed, John, the period you missed and the one that economists still, uh, name for danger danger danger is the 1930s, of course, because the money supply collapsed 30%, the price level collapsed 30%. And, uh, most of, and that one third of the banks failed and that was due to going off the gold standard. Um, so, so, so that, wasn't a, that wasn't a problem of the gold standard. That was the problem of, of FDR promising to go out off the gold standard, which he ultimately did and that triggered people running to the banks to get their dollars out so they could convert 'em to gold before they left. But that, that is not a phenomenon, uh, of capitalism. Unfortunately to this day, if you ask an economist, what caused the massive deflation of the 1930s, uh, he'd say, uh, the gold standard just blame the gold standard. It's a shame
Speaker 7 00:49:57 And, and I blame the fed quickly cause I blame the fed.
Speaker 0 00:50:00 Want to get to to Jason?
Speaker 1 00:50:02 Thanks John.
Speaker 0 00:50:04 Go ahead John, but, but quickly, cuz I'm I wanna get to Jason before
Speaker 7 00:50:08 The, I I put more emphasis on increases in productivity during the Robert barren era over, um, the gold standard. And then during the depression, I blame that on the fed lending too much money to Europe to create the roaring twenties. I'll shut up.
Speaker 1 00:50:25 Thank you.
Speaker 0 00:50:26 Great points, John. Thank you, Jason. Thanks for your patience. Good to see you, Jason. You wanna unmute if you can.
Speaker 8 00:50:37 Oh yeah. Thank you. Thank you Jennifer. Hi Richard. Um, hi,
Speaker 8 00:50:41 Uh, great lesson economics as usual. My question is just a basic, uh, sort of economics 1 0 1. My understanding is that we, we, we, we got off the gold standard. We got off the silver standard because China and, uh, and Hong Kong got off the gold standard, but silver standard in 1935. So I just have two basic questions. Um, why did we have to go off the gold standard because China did. And what are your thoughts? I mean the silver standard because China did in 1935. And what are your thoughts about the silver standard and it's uh, in term vis Avi inflation, uh, you've talked at, at length about the gold standard and inflation and I've learned a lot, but what are your thoughts about the silver standard, uh, in terms of inflation and why did, why did America have to go off the silver standard? Because China went off the silver standard in 1935.
Speaker 1 00:51:32 Well, the first point, thanks, Jason. The first point I would make is, uh, you could use gold and silver interchangeably as a perfectly valid objective monetary standard, and both have been used in cases where they're both used together. It's called bism. And so that's more of a technical point, but certainly go silver based money and or gold based money is better than in convertible Fiat, uh, paper, money. Um, uh, but the most of the us history, the us did start somewhat with silver, but then transferred to gold. There's very technical reasons for that. But the more important point is why did the us go off, go off the gold standard in 1930, uh, 4, 3 34. It was not. Uh, Jason, in my view, due to China, the key thing was Britain went off. The gold standard Britain was the most, uh, prominent economy and currency in, uh, 1930, but it was on the decline because of Kasian policy.
Speaker 1 00:52:26 So the credibility of the bank of England went down, down, down as canes became more famous and Britain went off the gold standard on the grounds that it was preventing them from inflating really was their argument. And, uh, the us followed after that. So the us copied, not China, but Britain in a very tragic way. Britain went off in 19, September 31, uh, 18 months later, uh, FDR went off, but that 18 month period was very crucial cuz it was shocking to wall street and American investors that Britain went off. The gold standard Britain had been on the gold standard for a hundred years. And so for it to go off the gold standard was a shocker and it, it naturally led people to think, oh my gosh, the us is gonna do that. And FDR at first said he wouldn't then he, he got elected and there was like a six month period between taking office cuz the president took office in March at that time, not January. So, uh, lots of history here, but that's how I would put it that the, any the arguments at the time for going off the gold standard were economies are collapsing. Stock markets are collapsing, banks are collapsing and the only counter to this is we need to be able to print money without limits. So let's get off this stupid gold standard. So they blame the gold standard and uh, went off it for that reason. Um, that's really the main reasons.
Speaker 0 00:53:47 Thanks.
Speaker 1 00:53:49 You're welcome.
Speaker 0 00:53:51 Great
Speaker 2 00:53:51 Jump in
Speaker 0 00:53:52 For a sec. Yeah, please do. And uh, um, I'll put an invite into Steven though. Not sure he's someplace where he can speak.
Speaker 2 00:53:59 Okay. Um, Richard, a quick question, uh, to those of us like myself who mainly follow, um, us news, um, and have lay understanding of, of, um, economic, um, watching the, the government, um, vastly expand its budget and pump, uh, trillions of more dollars into the, uh, my supply. It we've been kind of waiting <laugh> for, um, inflation today called and so, but, um, so your explanation of why it didn't happen is interesting, but could you, I wonder if you could relate this to, um, this inflation appears to be a worldwide phenomenon, at least it it's happening in Europe as well as us and elsewhere is, is, is the same, are the same factors at work, um, internationally.
Speaker 1 00:54:56 Yeah. So phenomenon is, is similar. You have welfare states all over, all over the world doing this, uh, interestingly the, uh, Le believe it or not less welfare status countries. And it says it's hard to believe, but I would include Russia, Russia and China in this are not experienced a decline in the value of their money, uh, because they're not, uh, you know, full-fledged propagate welfare states. But the answer to your question, David is yes, the under underlying fundamentals are the same, the, the currencies, the major ones now, uh, the, the pound, the Euro, um, are to the extent they lose value. It's also because people are losing confidence in the value of the money due to the fact that it's being printed without almost without limit due to the fact they, each government is deficit spending. So they're, they're hurting their economies, which makes the tax revenues depressed, but they're not depressing government spending.
Speaker 1 00:55:50 So the gap is widening and, and investors know this and, uh, currency holders know this and it's, it's a kind of a chickens coming home to roo story. But, um, it is, it, it was a head scratcher for a long time, because as I said before, between yeah. And you know, this David, I think between oh eight and until recently, it's not as if there weren't in big increases in the money supply. There were. And so people got very comfortable saying, well, I guess we can do this without limit without any, uh, deleterious consequences. In fact, modern monetary theory, MMT, if you, you know, became very popular, less popular now, but MMT said, um, just that it's a kind of Casian prescription. The government could print money almost without limit and without bad effect. That was the, that's the theory, bad effect, meaning no inflation, but equally it said, Hey, it can also borrow money.
Speaker 1 00:56:42 Uh, a lot of money issue, a bunch of bonds and, and all else equal that would make interest rates go up and interest rates aren't going up. So they had a two pronged, uh, kind of magic wand. They can print money without limit and they can borrow money without limit. And this was very sexy and exciting to the welfare status because that's how you win elections. You spend like crazy, but you don't tax people. You, you print money and print bonds well knows what's happening. Both the value of money's going down. We are getting inflations now and bond interest rates are going up. So the MMT people are kind of scoping away saying, well, I get, okay, well maybe we were wrong. Of course they're not at levels bond yields. Aren't at levels David that we saw in the Carter years that was like 15, 16, 17%. The us 10 year bond yield today is still only three. So it seems like a very low interest rate, uh, given the inflation we have. So the inflation rate is above the interest rate. That means if you own that bond, you're losing money. You're, you're getting a 3% interest rate, but the value of the money is falling 8%, eight or 9% a year.
Speaker 2 00:57:51 Yeah. Thanks. Thanks Richard. But by the way, I, this is a great, um, great talk. Um, I, you know, as, again, as a layman, um, I've heard George reman lecture and I've heard your explanation and they're both models of polarities. Hell
Speaker 1 00:58:06 Thanks. Oh, thank you, David. Thank you, David
Speaker 7 00:58:08 Productivity. You have to have falling productivity
Speaker 1 00:58:12 To counteract inflation. If there are no other questions I did wanna throw in something that might help people understand headlines. The federal reserve is raising interest rates, right? To quote, fight inflation. If you understand the model I went through the cure for inflation would not be to raise interest rates. The cure for inflation would be to stop printing money and they won't stop. If you look at the money supply, I mean, it's come down a bit, the rate of increase, but over a two year period, they increase the money supply 40%. The, the economic output of the country, didn't go up 40%. So, um, raising interest rates, why are they doing this? I mean, interest rates go up anyway, when inflation does, cuz lenders are losing money, the money get that's paid back to them is worth less, right? So they charge more. That makes sense.
Speaker 1 00:59:04 Uh, so interest rates are gonna go up anyway. But the reason I wanted to mention this as self-defeating is their real, uh, motive is to cause a recession. Now think of this and they say this, they say it's cheaply, cuz it sounds maniacal. And it is maniacal. Their view is inflation is caused, get this not by too much money supply, but by the economy growing too fast, they, they think fast. They think too much production of stuff. You've you've heard this before the economy's overheating. Uh, another way they'll put it as, uh, the Phillips curve. If you know, from, uh, textbooks, the Phillips curve says there's an inverse relationship between inflation and unemployment. So when unemployment rate is very, very low, uh, it's hard to hire ki hire hard to hire people. So you bid up their wages and that quote causes inflation. And likewise, if there's a recession, if there's high unemployment, it it's supposed to go the other way. You're not supposed to get an inflation. So what if you get high unemployment rates and inflation, that combination is not supposed to exist according to the Kasians. So they call it stagflation, but it's a very maniacal policy because the fed, when you think about it's trying to slow the economy, instead of trying to slow the printing of money, it's absolutely maniacal
Speaker 9 01:00:24 That's,
Speaker 1 01:00:24 But it's also five o'clock. So I'll
Speaker 9 01:00:26 Stop. Uh, that's great stuff. Um, appreciate that. Richard look forward to part two tomorrow. September 2nd is Atlas shrug day from the recurring date in her novel. Uh, the Atlas society's having a big hour long celebration on zoom at 3:00 PM. Eastern scholars, staff donors, fans will be sharing stories. Uh, there will be a breakout room. Um, we've also got our gala coming up October 6th in Malibu, honoring Michael sailor. We're gonna have panels with the scholars during the day. Uh, we hope to see you with those events. I apparently have a lightning storm, but thanks everyone for joining us. And uh, we hope to see you at these upcoming events Ja.
Speaker 0 01:01:07 Yep. Wonderful. Thank you Richard. Thanks Scott, David, Jason, uh, John, always great to see you and um, hope to see some of you guys tomorrow for our, uh, breakout sessions and discussion. Uh, just go to the Atlas society event section, uh, on our site and, uh, it would be fun to see you there. So thanks everybody.
Speaker 9 01:01:29 Thanks
Speaker 1 01:01:30 Everyone.
