Episode Transcript
Speaker 0 00:00:00 So well, fantastic. Uh, Richard, this is, uh, I wanna welcome everybody. Um, my name is Jennifer Anja Grossman. Please call me JAG today. We have, uh, our senior scholar, professor Richard Salzman, um, from duke university. He's gonna be talking about the issue that is on the top of voter's minds, for sure. Recession, essence, cause and cure. So, uh, originally take it away.
Speaker 1 00:00:30 Great. Thank you. Uh, Jennifer, thank you, Scott. And all for joining, uh, I last time on clubhouse covered inflation and I will bring that up today, cuz it's somewhat relates, but today I wanna focus on recession and uh, the essence of what recessions are, what causes them and what cures them. I, I will talk a little bit about, um, what is perceived to be a current recession, but I also wanted to bring in a broader picture, which might be interesting to you because recessions are part of a business cycle. So I, I also wanna tell you a little bit about what that is, what the theories of business cycles are. Uh, a little bit of the history, uh, to give you some context. I think that'll be much more interesting, including the question of whether if we had pure, less say fair capitalism, would there even be recessions or even worse depressions.
Speaker 1 00:01:21 Okay. So first of all, uh, just definitionally, uh, most economists today, uh, define a recession as a contraction in output. Uh, put another way a decline in output izing and even further, if we produced 10 widgets last year, we only produced eight widgets this year. This was what this is what's meant by a decline. So there's still production. There's just less production than the last year. Uh, that would be a 20% decline, right? That's huge. Now it's not just output and this can be measured various ways. The most common figure is something called gross, gross domestic product or GDP, but you could also use an industrial production index, which has gone back I think 120 years or so the fed produces that, which is nice, but they also measure things like jobs, employment, uh, sometimes the unemployment rate and, and so, em, uh, so employment would decline as well, uh, in a recession now, uh, there's a group called N B E R the national bureau for economic research.
Speaker 1 00:02:25 They're up in Cambridge and they're the ones who officially date put dates to the business cycles, not just recessions, but also expansions. So, and they using these various measures and they formally come out and, and date them. Some of it's just for statistical purposes, some of it's for research purposes, of course the politicians will latch onto this as well, but it, it's not a bad method of gauging and measuring, you know, how the economy's doing over a cycle, how often recessions are, I'll give you a little bit, uh, of that later, but they look at the depth, the diffusion and the duration. Now the depth of a recession is how much percentage it declines in output, you know, is it down 10%? Is it down 20%? Most recessions are outputs down like three or 4% diffusion means, is it just in one sector or many?
Speaker 1 00:03:14 Well, usually these recessions are refer to the broad economy. It's not that every sector would be in recession, but if predominantly, most of them are, that's considered a more diffuse experience and that's considered more of a recession. So it's it's for those of you in economics will know this is considered a macro economic phenomenon. It's a big picture, the entire economy then also duration. Uh, the average recession since world war II has been 11 months, but the one in 2000 7 0 0 9 was 18 months. And the one in 2020 was only two months. So, so they can be a short duration or long duration as well. So those are just the mechanics of, of measuring these things. Uh, now I wanna talk about what's considered phases of the business cycle. Uh, you can look this up it's it's kind of standard stuff, but there are three or four basic phases to what's called the business cycle and starting with the good part is expansion.
Speaker 1 00:04:09 So expansion is a period when the economy is growing and sometimes, you know, so in other words, at a positive numbers, three, 4%, and, and it might even be accelerating. It might be going say from 2% to 3% growth. And these usually last three or four years, maybe even more, maybe five years, then it hits a what's called a peak. And you only kind of know this in retrospect, you look back and say, well, the highest growth rate was, you know, 5%, then it started decelerating a re. So, so then it decelerates and then goes into recession. If, as I said before, there's a negative, uh, contraction. If there's a negative, uh, output number, now depression simply means a really serious recession. There there's no technical, uh, reason for calling it depression, other than it's a really bad recession. There's really huge long, uh, high magnitude, uh, contraction.
Speaker 1 00:05:01 Now after the recession and depression, there's something where economists call recovery. It's almost like a health like, so the patient is sick and then it starts recovering. It's not fully expanding yet, but it's recovering from the recession and, and the, the bottom of the recession would be the trough. So that just gives you an idea. You could take a pencil and paper and just write, you know, on draw on, on a piece of paper cyclicality, uh, over time. That is really what the business cycle is. Uh, now if you want to dig into the numbers here, just put in N B E R business cycle dating, and you'll get data on all business cycles since 1790. So it's kind of cool. They have all the data there now. Um, since world war II, I, I just did a quick count. There have been, um, how many recessions there have been, uh, 124 months of recessions.
Speaker 1 00:05:55 So the average was 10 months. Uh, the economy is in recovery or expansion, uh, 86% of the time. This is since world war II. Just to give you a sense of it. There have been about a dozen recessions since world war II. They last about 10 months and, uh, they represent about 14% of the period. So 14, only 14% of the time is the economy contracting. So the normal case of course, is for the economy to be, uh, expanding now four quick theories of the business cycle, including recession. I'm gonna go from worst to best theory. So, so the worst theory is what's called the shocks theory. This is where economists. They really have no idea why there's a, you know, huge expansion or a huge depression. They can't really attribute it to anything. So they pick out one or two factors and they just call it a shock.
Speaker 1 00:06:48 Now, a shock to them means, uh, UN caused. It's just like out of the blue, like a lightning sh shock, uh, in the seventies, they would say something like OPEC, uh, OPEC, uh, oil embargo, you know, unexpected. That was a shock. And it caused a recession. Sometimes what's called real business cycle. Theorists will talk about technological innovations causing a shock, you know, some introduction of new product that makes obsolescence, uh, normal in another. And so you get unemployment, you know, because some products are, are, are deemed obsolescent. Those are not really very good theories of, of the business cycle. History shows the second, um, less worse, but, but no better theory is totally psychological. This is a theory that says there are seeming waves of undue optimism and then undue pessimism as to where as to where the optimism and pessimism comes from it. It's also seemingly unco.
Speaker 1 00:07:43 And there's a kind of a herd mentality that a, that some economists canes had this to some extent. And, uh, some of it on wall street you'll hear fear and greed or boom and bust. And, but the whole thing is, is, is like it's like emotions drive the drive, the business cycle. Uh, a third theory is this is totally from Kanes, but it goes all the way back to malice. This is the idea that economies go into recession because there's too much production. Now, what do you think of that one? This is the overproduction thesis sometimes called a general glut. That was the old word for it. But over production is the idea that the capitalist economy is actually so successful and so productive that it over produces. It makes too much stuff. The stuff starts piling up on shelves. The inventories grow for some reason, there's not enough purchasing power or quote unquote aggregate demand to buy all this stuff back and businesses notice this and they stop producing and they lay people off and they shut plants and stuff until it all recovers.
Speaker 1 00:08:47 So that is a totally false theory. I just wanna lay it out there. We can have whole sessions on why it's not true. It denies something called say's law, but it is out there. And it is one of the reasons you hear sometimes in a very goofy way, someone will say the economy is overheating. It's, it's growing too fast, almost like a car that's, you know, the engine's gonna seize up soon, cuz it's going too fast. So, um, that's called the overproduction thesis. The best theory I'm leaving the best for LA the least worst, but really a decent theory is what's called, uh, monetary interest rate. It's from the Austrian school, the, the monetary credit slash interest rate theory of the business cycle. Now this is the best one. This is the one that says what really causes the business cycle. And in the worst case, recessions are wide swings in inflation and interest rates.
Speaker 1 00:09:42 Um, not to get too technical here, but inflation, uh, has to do with the value and predictability of the value of money and money is half of every transaction. So if half of, if the value of half of every transaction is fluctuating, that is very disturbing to business planning and production. So it's one of the things that causes uncertainty and causes cyclicality, but interest rates also again, a technical subject, but interest rates are the cost of doing business for many businesses is a cost of credit. When you go get a loan, if interest rates are fluctuating all over a place, especially if they rise, that's a increase in the cost of doing business. Those two tend to cause business cycles. Um, so I'll leave it there, uh, in terms of the theories of the business cycle, but to just back up and say one more kind of, um, maybe provocative thing under capitalism.
Speaker 1 00:10:34 Um, and I'm picking the period here now of purest form 1865 to 1914. And I'm picking that because there's no central bank, there is no federal income tax. There is no broad based regulatory agencies. It's a fairly free, there's free trade, pretty much there's some tariffs, but it's a fairly free economy. What you saw in that period that 50 year period is almost no recessions. It's really quite a remarkable record. Now what you do have is fluctuations up and down, but in a rising trend, if you know what I mean, so there would still be cycles. I believe under capitalism, there were, but, um, it's very unlikely that the entire economy or the bulk of it would, uh, crater or crash. Why? Because money and interest rates are fairly stable. You're on a gold standard. The money is reliable because it's reliable. Interest rates remain low and not just low, they don't fluctuate a lot.
Speaker 1 00:11:30 So the entire context of doing business under capitalism is much more, there's much more surety and confidence about the future makes it easier to plan makes it less likely to make widespread mistakes, widespread mistakes. When you think about it are really what, uh, recessions amount to correcting the mistakes, shutting things down that aren't working anymore. The history since 1913, since the federal reserve was formed and became a big part of manipulating money and interest rates. And of course we all know going off the gold standard plus the tax state plus the regulatory state, there are, we all know very many more ways for government into intervene in the economy than it did during the capitalist period. And this is what's the big driver of business cycles and swings and especially of downturns and contractions. But I still contend that the main thing is money and interest rates.
Speaker 1 00:12:23 Sometimes people will say we get recessions due to tax hikes tax policy changes, not as, uh, often as monetary policy. So whereas you can certainly get tax hikes that are very negative as ha occurred under Hoover. For example, Hoover raised tax rates right in the middle of a recession and turned it into a great depression. That's normally not what causes the cyclicality, the cyclical itself and the tipping into contraction is largely due to the federal reserve, raising interest rates in reaction to them having already increased the inflation rate. So notice that is exactly what we're seeing now about two or three years ago, the federal reserve increased the money supply about 40%. It started causing inflation. That's why we're all seeing, you know, seven, eight, 9% inflation. Then it turns around and says, well, the way we have to fight inflation is we have to slow the economy.
Speaker 1 00:13:14 Now think how weird that is instead of slowing the money supply, which was the cause of the inflation, they feel the need to basically tank the economy. They, they go back to that Kasey in theory that says, well, if a fast growing economy causes inflation, then the way to fight inflation is to fight this fast growing economy. So they have this very perverse policy Powell set it just last week. He said, I'm gonna have to impose some pain. That's how we put it. And people ask, well, what do you mean pain? He said, we might have to go into recession. We might have to raise the unemployment rate, why to fight inflation. It's absolutely maniacal because inflation is not too many goods. Being produced. Inflation is too much money being produced. And the federal reserve just does not fix that by raising interest rates, by raising the cost of doing business.
Speaker 1 00:14:03 So this is what, uh, tips, economies into recession. The us in the first half of this year did have negative GDP. It fell, I don't know, 1.9% in the first quarter, 1.6% in the second quarter, where right now in the middle of the third quarter, or roughly in the middle of the third quarter and by most economic economists measures, if you have a negative GDP, two quarters in a row that is technically a recession now when they will name it, uh, that they usually takes them a year or so to look back after all the numbers are adjusted, uh, they don't name it right away. They wait to see when all the evidence is in. Um, so I'm not even sure really, in retrospect, they'll call this a recession, but the way federal reserve interest rates are going now, the direction they're going with the federal reserve, raising interest rates, um, I, I think it is quite likely that there'll be a recession.
Speaker 1 00:14:55 It takes a while, but probably in 2024, uh, not 2023, probably 2024. Last thing, very technical for those of you don't want to hear technical, just shut off your ears for a couple minutes here. The key in interest rates is the inversion of the yield curve. So if any of one, any of you out there even knows what that means. The yield curve, short term rates, midterm interest rates, long term interest rates. If you draw a picture of the yield curve are just look it up on the internet. The normal, the normal position of the yield curve is upward sloping. But when the federal reserve raises short-term interest rates a lot, it eventually flattens the curve and then inverts the curve, which means short-term interest rates are way above long-term interest rates. The reason I mention this is it is the best forecaster of recession.
Speaker 1 00:15:49 It has forecasted eight of the last eight recessions. It is a perfect doesn't even have mistakes in it. It is a perfect forecasting tool and I've used it in my, uh, consulting firm for the 20 years. I've had the consulting firm and it's never failed me. Now. The curve is not yet inverted, but a couple of more sessions of fed rate hikes would pu we will probably invert the curve by the end of the year. And when that happens, you count roughly one year ahead and you usually get a recession. So that's, I end with a technical point there. One last, uh, funny, very anecdotal point, I think too much is made of the business cycle and recessions and there. And the reason I say that is just as a personal point, if your own job or if your own company or sector is doing fine, the broader recession is really irrelevant, right?
Speaker 1 00:16:44 And, and so, you know, I, I tell students all the time the students will come out. They're looking for a career starting point. They're worried about the macro economy. I say to them, I don't care whether the economy's booming or in recession. The, the key for you is what's your economy. What's your particular context. And, uh, you're not necessarily in depression personally, right? I mean, economically. And, and so you can be re you can recession proof yourself. Not everyone has to be caught up in the broader macro recession that's going on. And then of course, the other way around, I mean, if the economy's booming, but your career isn't and you are, you know, your own career is kind of depressed. Of course, you have to do something about that as well. So, um, very, uh, interesting comment when candidate Reagan in, uh, 1980 was running against Jimmy Carter and there was both high unemployment and high inflation, which is called stagflation.
Speaker 1 00:17:38 And he was mocking Jimmy Carter, the incumbent and people at the time as they are now were debating. Are we in recession, depression, recovery, what's going on? There was a big debate and Reagan's famous. Very funny line was a recession is when your neighbor loses his job, a depression is when you lose your job, but a recovery is when Mr. Carter loses his job. So I thought that was one of the great lines of the campaign. And of course, when the supply siders and Reaganomics came in in the 1980s, there was a wonderful, uh, economic recovery from the Carter year. So that's all my, that's all the thoughts I have. I'm, I'm open to questions and comments.
Speaker 0 00:18:20 Thank you. Thank you, Richard. Um, I want to encourage those of you who have questions for professor Salzman. Please raise your hand. We'll bring you up on stage and a personal favor. If you haven't already, please use that share button down below, share this on clubhouse, share it on social media and, uh, we'll bring some others into the room. But first we'll start with Lawrence. You have a question for professor Salzman.
Speaker 2 00:18:48 Yes. Thank you. So, uh, actually really, to your last point there, Richard, my question is so due to, you know, globalization of, you know, trade across the world, we've seen instances where markets being affected in one side of the world can affect things elsewhere, or at least maybe I might be wrong on that, but that seems to be my understanding, but my question would be if the United States hypothetically was on the gold standard, would that help the United States be more buffered against any economic instability that other countries have? Or would we still have some sort of, uh, noticeable effect?
Speaker 1 00:19:33 Well, that's a good question. Let me take it in two parts. The last one first oil is equaled. If the us were on a gold standard, it would share in those principles I named that occurred after the civil war to world war one, namely the monetary standard would be stable in inflation and deflation would be off the, off the, uh, menu, uh, interest rates would be more stable. You can look at this historically and just look it up and see that the, that that's what happened. So all O SQL the us would prosper more relative to other countries that did not have the gold standard. And, um, the overall growth rate would be faster and the cyclicality would be less. But the first part of your question, Lawrence is a good point because it's worth bringing up the issue of globalization. The idea that a country is not isolated, uh, but you know, in a protectionist way, but rather integrated with the rest of the world.
Speaker 1 00:20:25 Um, it, it entirely depends on what percentage of your imports and exports is of your economy. So in the case of the us, the us economy now imports and exports are something like 10% of all economic activity, but a country like Hong Kong or others that are more island nations, uh, and many in Southeast Asia, you know, half of there maybe half or more of their economy can be associated with trade. So those kind of countries are going to be more, uh, influenced by foreign of foreign events and the, and the us less so, but it it's worth, but it brings up a broader point of, uh, you know, whether business cycles are central to capitalism or not. Because one of the things about capitalism is, and, and it's not only an issue of international trade. Capitalism is definitely in the direction of being integrated with other nations and other economies.
Speaker 1 00:21:16 But it's also very interesting because it has, what's called a structure of production, you know, from the, from the kind of technical here, but from the process of taking stuff, extracting it out of the ground and then manufacturing it and then transporting it and then sending it to wholesalers, you know, and then wholesalers send it to retailers. This is what today is called the supply chain in capitalism. There's a long supply chain. It, in other words, it's a complicated, long term system of production. And that's one of the reasons why it's more productive. We're literally not living in a hand mouth existence. Okay. But what's interesting about that. That makes it more prone to cyclicality, but precisely because long range planning is involved, it's a very delicate mechanism and markets are interconnected. All these markets, I just talked, talked about manufacturing and farming and retail and wholesale.
Speaker 1 00:22:13 So if something goes awry in one, it's likely to spill over into another, but then on the positive side, too, if something positive happens in one, it happens in another. So, so in that regard, a, a go the other way, a really primitive economy, when you think about it, wouldn't have much cyclicality. It, it would just stagnate, you know, every year in and in year in and year out. And so it would lack business cycles, you know, and an economist today might say, great. It has no business cycles. Yeah. But it has no growth either. And, uh, I liken it sometimes to, uh, you know, when cars were first introduced in the early 19 hundreds, you know, when there were very few on the street and there was no congestion and no one was driving very fast. And other than the fact that people were getting used to driving, you know, all else, if everyone's driving slow and there's a lot of distance, there's, there's not gonna be a lot of accidents, but if you're on the freeway in LA and everyone's going 65 miles an hour, and there's not much room between bumpers, it doesn't take much to have a multi-car pile up, you know, and a multi-car pile up is like a recession.
Speaker 1 00:23:19 It's like a depression. It's like all the industries crashing into each other and, and doing damage. And, and the irony of it is it's more likely to happen in a high speed, you know, freeway advanced setting. So it's, it's kind of a paradox that, uh, um, people sometimes, uh, you know, blame capitalism for having cyclicality or booms and bus or business cycles, but it could also be interpreted, I think it should be interpreted in many way, other than government Ave intervention causing it as a kind of, uh, byproduct of vitality.
Speaker 0 00:23:56 Great. Thanks Clark.
Speaker 3 00:24:01 Yes, Richard, thanks so much for this presentation. Um, thanks
Speaker 1 00:24:05 For joining.
Speaker 3 00:24:07 Yes. I just wanted to, uh, get you to, uh, expand on something. Um, when I read Austrian economist, uh, they always mentioned recession as something that we should not try to avoid, uh, because it's, it's almost like, you know, if you've gone out last night and got really, really drunk, you have to, I mean, there almost has to be a hangover, uh, to, to get better. And in fact, I, I wanna say in the past, I've even read sun monster economist who actually claim higher interest rates are a good thing because you know, they, most of the time they're, they're held artificially low for way too long. So I guess what I'm getting at is, I mean, if, if, you know, in order to really get out of our, you know, our, our, our bad economic times recession a recession is almost like the necessary cure.
Speaker 3 00:25:04 If I've read these Austrian economists, right. And often they say, I, you know, I've read before, it's like, it could, it could be two years, two years of correction. And of course we know that the last, you know, I guess since COVID started, it's just been an unprecedented amount of monetary, uh, expansion. I think something like for over 40% of the money supply has been expanded. So I guess that would be like, you know, going out last night and having, I don't know, 10 stiff drinks in two hours. I mean, there, I mean, doesn't, there have to be pain. I know that's, that's not a, a very great thing to sell freedom and free markets on, but, but what, you know, when you, <laugh>, when you've done what we've done to our economy, you know, this incredibly unprecedented monetary expansion, I mean, isn't it incumbent on us that, you know, who favor freedom and free markets to explain to the American people that, you know, we've, we've tried to get, have something for nothing for, for way too many years, and now we are gonna have to pay for that. And, you know, I know, I know back in the Reagan administration, you know, they called it root canal, they got mad at David Stockman. And this is, you would remember this Richard cuz I think you're, you were keeping up with stuff like this, but, but I mean, in, in some cases you almost have to have pain and root canal to, to just correct from just incredibly bad policies we've been following, you know? Well, at least since COVID started, I mean, could you expand on that?
Speaker 1 00:26:35 Yeah, I'd be glad to. I think there is some truth to the argument that recessions, uh, cleanse the system because, uh, you know, they amount to ending projects, closing down plants, you know, firing less productive people. And if you don't do that for J for example, Japan did not do that for many years. And they ended up with what's called zombie companies. So companies that still exist, but they're not profitable and they just have people in them, you know, sitting at desk. And, and so there's a certain truth to that. Uh, and that is a, uh, a major message of the Austrian. Don't do anything while the economy's collapsing. The reason I push back against that sometimes is back to my original point if government intervention, as I, as I argue and most Austrians do, if the government intervention is the cause of the collapse, you, it is incumbent upon Austrian economists in any economist to say, stop doing that, stop punishing the patient.
Speaker 1 00:27:42 And if the, put it this way, if the original, uh, fault was say printing money or artificially lowering interest rates, or, you know, trying to smack down, sometimes I'll try to smack down the stock market cuz they think the stock market's growing too fast, uh, with the irrational exuberance greens span called at once. Remember so, but if that's the cause of the recession and in my view, that is the cause of most recessions and depressions in the post 1913 period, then, uh, it's incumbent upon them to stop doing that. Meaning tax cuts, uh, return to sound money, return to level interest rates deregulate. And they tend sometimes they do not do that during recessions. Now, if suppose right now it suppose the us is in a recession right now. Notice what they're doing. The fed is raising interest rates. That's gonna make things worse. They just raised tax rates on corporations.
Speaker 1 00:28:37 That's gonna make things worse. They're regulating everything. They're trying to shut down fossil fuels. So Hoover did this in 1929 in the late twenties. He turned a recession into a, uh, great depression. FDR didn't help after that, but, but, but Clark, it is possible to do, you know, pro-growth things during recessions. And, and so, so in that regard, I disagree a lot with Austrians who say literally do nothing, do nothing. And, and that was the alleged theory in the thirties that, uh Kanes and others, uh, leveraged off of. So, um, but yeah, to the extent they try to fix recessions by continuing to intervene that that makes recessions worse. And we should be opposing that obviously the root can, for those who don't know, I do endorse the root canal idea was suppose the economy goes into recession and government revenues go down. That's very common and a budget deficit develops.
Speaker 1 00:29:39 So the government is spending more also on unemployment, right? So they're spending more and taking in less. So there are budget deficits. Well, the standard view of the Kasians was so what, let there be budget deficits, uh, don't do anything about them. Maybe government spending will help the economy get out of recession. And until the Reaganites came along, the unfortunate response of Republicans was raise taxes to bring in more revenues. So their, their sole focus, this is what the root canal, what was called root canal really take the pain of. So, so there's a budget deficit, you're inner recession and the Republicans would come in and say, we need to balance a budget. Let's raise taxes. That is very Hoovers. That is the really the kind of thing that, that made recessions worse. And of course didn't gain them any votes. So the real revolution of the Reagan people was when there was a recession, their view was not to raise taxes during recession, but cut, but to cut tax rates, uh, the laugher curve. So messed as an aside, we can talk about that, uh, at another time.
Speaker 3 00:30:42 Well, I mean, can we agree then that it's, it's likely that when we do get into worse times in the next, I guess years so that yeah. You know, I, the, the people in, you know, Powell and, and company and the whole group of, you know, even if Trump is back in the white house and we're still in a recession, I mean, can we just assume that, that the right thing won't be done? And in fact, it'll just be more, you know, more of the bad things that caused it. I mean, they'll, they'll just try to, you know, tax spend and inflate their way out of, out of, you know, the coming hard times.
Speaker 1 00:31:18 Well, I don't think they'll tax as much they'll, but they'll definitely return to printing money and spending money. Yes. So we're in a very bad, uh, feedback loop, unlike the eighties and nineties, when it was a positive feedback loop due to supply side economics, but in the last 20 years, it's the Kasian system and the Marxian philosophy and Kasian policies are back. So it's a rewind of the sixties and seventies, which is very unfortunate. But, uh, no, I, I, I don't think in the next recession that they would adopt supply side policies. I mean, supply side Reagan asked that kind of thing. I'm a supply sider through and through that is thoroughly hated by the establishment today, even within the Republican party, to some extent. So that, so I'm an old Reaganite, there's none of us, there's very few of us left. Uh, the only thing you can get on, the only thing you can get on TV is Larry Kudlow show.
Speaker 1 00:32:15 He has sometimes has art laugher on and Steve Moore and others, but, uh, there can't be more than a half dozen of us with any voice anymore. So it doesn't dominate the policy mix anymore. I mean, thankfully intra thankfully tax rates are not back to what they were pre Regan. I mean, pre Regan, the top tax rates were 70%. The top tax rate today, I think is 40%. So it's not as punitive as it used to be, but the regulations are much more extensive. And the federal Reserve's power to print money is way more extensive. So that is really what's killing. What's killing us is the federal reserve has grown in a gargantuan manner in terms of its power to print money without limit. And anytime there's any crisis they tend to do so in ways they never did before. Never, never, never. So we had, uh, nine 11, they did it, um, the 2002 tech, uh, telecom tech crash. They did it Y2K. They did it. There were like three times in a row. They did in the early 22 thousands. Then they did it during the ho the house prices of oh 7 0 9 and then more recently COVID. So there have been like four or five waves of fed panicky money printing, which is enormously increased the money supply in the, the, uh, the dangers to the us economy.
Speaker 0 00:33:39 So Richard, when, um, hold somebody coming my question, though, when you say that you see us possibly in recession next year and not this year, so you are, uh, rejecting this idea that two quarters of negative growth constitute a recession.
Speaker 1 00:34:01 No, I'm not. I'm admitting that that's the definition. And I just think that when time passes, they'll revise those numbers and they'll just come in at zero, the, the, the, the economy is basically gone to stagnation, whether it's in actually in negative territory, I think it'll be time to, it'll take time to know that, but if the numbers, but Jennifer, it's true. If the numbers don't change, um, and those first two quarters come in at, you know, minus 1.9 minus 1.6, then, uh, and that, uh, yes, someone later will year recession, but the, but half year recessions are nothing. They're, they're, they're like a blip on the map, but what I'm warning is the federal reserve is now raising interest rates so much that it just, it historically is matching the kind of policy conducted previously for recessions. So this is gonna be, it could be the kinda thing where people become complacent after this year is over and they think, oh, wow, we, we Dodge that recession and then a big Whopper on cause that's what the fed is doing right now. Unless it reverses course, it's about to raise rates. I don't know, three or four more times. And that means short term interest rates will be up to four or 5%. The yield curve will be inverted. And every time that's happened in the last, uh, 60 years, it's been followed by a, by a recession. So with a lag though, that's why I'm saying the, if they did this, the recession wouldn't come until something like 20, 24, which is the election year. So that'll be very interesting if it happens.
Speaker 0 00:35:44 Got it. Um, also I did wanna recognize that one of our colleagues, professor Steven Hicks, uh, professor of philosophy at Rockford university and senior scholar at the out society is in the room. So Steven, thanks for joining us and, uh, would love to have you come on up. If you have a moment and someplace where you can talk, uh, Keith,
Speaker 5 00:36:07 Thanks, Jennifer. Um, I wanted to ask you a question Richard, about deficits and yeah, I happened to watch a, a video of John ho speaking in 1984 was on YouTube and he was built a whole speech about how we have a 1.2 trillion deficit at that time and how terrible it is. And now I don't even know what the number is. I think it's over 30 trillion if that's, if I'm right. Uh, but it's, it's, it's outrageously high at this point. And I wanted to know, is there from, from a supply side economic standpoint, or even just from an economic standpoint or your personal standpoint, is there a metric by which one can say a certain amount of deficit that a country incurs is manageable? Um, what's, what's the threshold beyond which okay. That deficit's too much. It's never gonna get paid off. We might have to default.
Speaker 1 00:36:52 Good question, Keith, first of all, the terminology, it's not deficits it's debt. So the deficit is an annual thing it's, uh, spending versus tax revenues. And the us is in deficit right now has been for many years because it spends more than it takes in every year in taxes. All right. But it's true. It's like your credit card. If your spending more than your income, it adds to your credit card balance. That's what the national debt is. That is the total amount that the government has borrowed. And it's true. You that's the number you cited. 30 trillion is now the totaled federal debt. Uh, it's the totality of all that the government has borrowed over the years, obviously due to a successive series of deficit spending years. Now you asked about metrics. Uh, I hold a, I wrote a whole book on this and there are metrics that are relevant to things like tipping points and you usually have to relate the debt to national income, but that would be true, you know, personally, too, if I said to you, uh, you know, Keith has 300,000 in debt, is he in trouble?
Speaker 1 00:38:01 Well, it would, it would matter what your income is, you know, and it would matter whether you had a 30 million house, you know, and your mortgage was only 300,000. So you always have to relate debt to something. And debt has to be serviced. The interest and principle have to be paid. So where does it come from? From the government taxing people? And so the tax what's called the taxable capacity of a people matters. And the American people do not like to be taxed. So the, the risk of the us is running is that it has a populace, which by now wants a gargantuan welfare state, which means they want Gargan and spending, but they're also not told they have to pay for it through taxes. And so they ne so they never feel that, or it's only rich people who are pay the taxes. So the whole tax code has shifted, you know, away from, I think it's something like 54% of Americans pay no income taxes.
Speaker 1 00:38:58 So that means the other half does and it's graduated and they pay the most of it. Nonetheless, the point is the government has found it very, uh, electorally advantageous to just spend, spend, spend, but to pay for it by borrowing money and printing money. So those are the, I mean the three ways of funding government is tax borrow print, but tax gets you thrown out of office. So neither party steps up and says, raise taxes to pay for all this. And so there's a bias in the system, which is leading the country toward insolvency. I, I wouldn't say bankruptcy cuz that's when you go to court and, and dismiss all your debts it's government who actually runs the bankruptcy court. So whether the us government, whatever, you know, go bankrupt in that sense is, is, is hard to imagine. But, but their defaults do occur and where you literally whoever's holding the bonds, you don't get paid anymore.
Speaker 1 00:39:56 Uh, states have defaulted before. There's a long history of states defaulting. Um, he, here's another way of, and the us, by the way, hasn't quite defaulted in the sense of not paying interest and principle on its debt, but it has defaulted monetarily in effect, every inflation is a default because it's the government basically saying, Hey, guess, guess what? The money we're supposed to pay back to you in interest and principle is gonna be worthless. We're gonna print so much of it that we're gonna repay you in dollars. That aren't worth as much. That is kind of a default. It's a kind of sly stealth default. And I'm not the only one who has said this, by the way, me's Hayek and others have described in the past that governments who resort to the printing press not only to pay for spending, but to get their debts paid is a kind of cheat.
Speaker 1 00:40:48 It's very much a cheat as an example, by the way, if you hone a, if you own a 10 year government bond today in the us, the interest rate you get is something like two or 3%. So you're getting paid two or 3% by the federal government to lend the money for 10 years. What's the inflation rate, 8%. I mean, you are losing 6% every year cuz the value of the money they pay you back in is worthless. So that's a cheat, that's a kind of default. So that's how I'd answer it. It is definitely, there's no tipping point in the sense of, uh, you know, next August, you know, 31 trillion will be too much, but the, but the ratio of debt to GDP right now is 120%. And for historical context, the, the highest it's been prior to this, uh, was world Wari. So when world war II was 125% and so it's as high as it was in world war II when the spending was gargantuan, I mean it was world war II.
Speaker 1 00:41:47 So it's a, it's a very bad trend. Uh, history shows that when governments borrow this much compared to the size of the economy, it itself slows the growth of the economy. And so I, I think Jennifer has, uh, linked to an essay I wrote for a, I R called, uh, from SL from fast growth to slow growth to de growth. If you look at that essay, you'll see some, uh, measurements of this, but long winded answer there, Keith, I'm sorry. But uh, the, the bias is toward borrowing and the more the government borrows, the more it, uh, burdens the economy you lend to the government, you're not lending the companies. I mean, that's what it comes down to and the government doesn't produce anything companies do. So this diversion of savings, if you will, from the private sector, public, uh, prosperous economy to the government is a, is a thing that's necessarily gonna slow down the economy. Sometimes people will say, well, why are people lending to the government? Why don't they lend a bit? Cause they're the government lending. The, the barn, uh, lending to the government is safer. So imagine a country that people would rather lend to the government than to businesses. It's very, it's a, not a very vibrant growing risk taking, you know, entrepreneurial economy. It's an economy where people basically don't trust, um, private sector lend borrowers and would rather lend to the government, even if they know the government is Paray.
Speaker 1 00:43:18 I hope that helps
Speaker 0 00:43:20 Scott. You've been very quiet, but I can hear you think,
Speaker 6 00:43:26 Well, you Richard, I just have to quickly say, I just heard your, uh, debate on the morality of capitalism and that was so good. You showed such a, a nuanced understanding of Rothbard and how his thinking changed over time. Um, and you know, I think even though you guys weren't that far apart, you actually swayed them. Um, so I, I was just really impressed by that, but, uh, because of that, I just wanna talk, uh, not because of that, but I, I think you'll know a little bit of the history, you know, in the panic of 1907, it, it was like, at that point it was like JP Morgan just brought everyone into a room and, you know, just kind of decided how it was gonna be settled. At least that's how I read, um, you know, the history. And so, and, and they say that the federal reserve was just kind of after he died, it was just kind of a continuation of that. And I'm just curious of your thoughts about that.
Speaker 1 00:44:25 Well, thank you for the comments about the debate. Uh, that was, that debate was, uh, by the way, uh, it was it's available online. Uh, you can go to my, uh, Facebook page and see the link. It was billed as a debate about the morality of capitalism, but it was really about anarchism and those guys were anarchists or that they called themselves Ann cap and anarchical capitalists. And I was arguing against that. And, uh, yes, I do think they were swayed a bit. Um, I think it's called essential libertarians. Um, I met KARE Mays at freedom vest and we had a good chat. So he had me on, so thank you for that plug. Yeah. JP Morgan was the most, uh, famous, accomplished private banker in the us. Um, yes, at the turn of the century, I think he died in 1913. Uh, not coincidentally the same year the federal reserve was formed and yes, he was so influential and so credible that if there were any kind of, uh, credit crunches or things like that on wall street, he would, uh, coordinate responses and, um, uh, stabilize things.
Speaker 1 00:45:30 And, and, and there were a couple of points where he bailed out the us treasury. So the us financial, the, the, the us government itself was less financially stable at certain points than JP, than JP Morgan, the bank itself. But, um, the federal reserve when it was formed in 1913, some of people pointed to the 1907 crisis. And, uh, that crisis was actually caused by government intervention. So very, very sad cuz it was pinned on the private, uh, banking system. But now JP Morgan is a hero of mine and the story of him and wall street in the years prior to the formation of the fed, it was a beautifully working system. And it was a time when bankers, you know, really cared about their credibility and their capital position. And there was no federal deposit insurance. They didn't need any federal government guarantees for people to be believing in their banks and believing in the, the conservatism and the prudence of those banks.
Speaker 1 00:46:29 And in that 50 year period, it was people like Andrew Mellon in Pittsburgh. And it was people like JP Morgan and in New York who were financing, uh, steel and aluminum and all the great industries and the car industries and stuff. So it was a wonderful combination and, and mutual support of finance and manufacturing. Finances gets a bad, uh, rap, as you know, it's often seen as just speculative, not a very productive sector. And I, I consider it in many ways, the most productive sector in capitalism when it's working well. So the JP Morgan story is great. I think there's a great biography of JP Morgan. I wanna say by, I think it's by chair now, but it might be by somebody else, but there's some good biographies out there of them that that should.
Speaker 0 00:47:16 Yeah. Uh, so Richard, just circling back to inflation a little bit, uh, with the numbers that came out this week. Yeah. Um, are you, were you surprised by them and why are so many of the so-called experts, you know, continually wrong when saying, uh, that, uh, inflation's coming down and um, it keeps going up.
Speaker 1 00:47:37 Well, part of it, Jennifer is when the federal reserve started, uh, increasing money supply a lot. There was no higher price inflation. And uh, so for a while people were saying, wait a minute, there's a disconnect. Where is this higher price? Is it supposed to come straight from the money supply increases? And, uh, the best way to interpret this is if the government increases the money supply, but people hold it, they hoard it. That is another way of saying they demand it. And that can put off the price rise. What has to happen is they have to turn around and start spending this money. You know, this, this gargantuan cascade of money when they turn around and not just hold it in their bank accounts, but spend it and not demand it anymore and says, spend it away. Then the inflation rate goes up and that is exactly what's happened.
Speaker 1 00:48:26 I think what triggered it was the lockdowns. Cause when you think about it, the government said, stay home, don't work, don't make anything. And here's a bunch of money. <laugh> well, people aren't gonna hoard that money. They have to go spend it. This is not working. And that's what triggered it. But I, I think that is maybe the answer to your question. Like why did a con, why did some economists get surprised by this? Because there have been a year or two of no price increases of any magnitude, even though there was a lot of money supply now that it's happened, of course, you know, anyone who didn't predict what will happen is prone to saying it'll be over soon. So they're gonna, so then they try to make up for their error by saying, well, it's just a glitch and it's just AGL blip.
Speaker 1 00:49:13 It'll be gone soon. And then I'll be right after all. But I, I, I suspect that these inflation numbers will remain high for a while. Not, not necessarily going higher than eight or 9%. I, I do actually think that might be the peak of this, but, but if you get six, 7%, 5% for the next few years, that's a lot of inflation. That's almost five times the rate that people experienced in the prior decade. So people just are not used to this, especially young people. Who've never seen it, uh, in, in their lifetime. And uh, but why do I say that if you look at the money supply numbers, the, the federal reserve is starting to bring down the rate of growth, not the total supply of money, but they're not increasing it as fast. So whereas it had been increasing at 40%, then it went down to 20%. I think the last number I looked at was 8%, but so they're still increasing the money supply by 8%, but at least it's not 40%. So yeah, in time this inflation number will come down, but it's gonna remain elevated for a while, uh, which will be painful.
Speaker 0 00:50:16 All right. We have time for another question. If anybody wants to raise their hand and come up and join us on stage, ask the question about inflation, recession, the economy, otherwise, uh, Richard, you know, kind of teeing off of Lawrence's question about, um, regional global influences. Uh, I'm, I'm wondering when you look at where we are with these two, uh, quarters of negative growth, um, are they being driven more by some sections of the country other than others are, you know, are, are, can, is it proper to speak of states whether, you know, state is in recession or not?
Speaker 1 00:51:05 Yes. If I, I would say from what the numbers I've looked at, the, the, the sectors that are really hurting now are, uh, energy and housing. Now energy is benefited by higher energy prices, but we're talking about an economy and you're talking about therefore production and growth, energy production has really taken a hit under the Biden administration's assault on fossil fuels, but it's also been the case in Europe and elsewhere. Now, interestingly, Russia is boosting its production of fossil fuels, but no one wants to buy it other than China. So from the other end of the world in Asia, I expect things to do better because they're actually willing to buy Russian fossil fuels. Um, so that's part of it. I mean, part of it is also the supply chain, um, disruptions. I talked about how capitalism, uh, one of the wonderful things about it is it has a complicated, long chain of production.
Speaker 1 00:52:04 Um, but it's easily disrupted. And C lockdowns definitely did that. Um, it wasn't COVID itself. We know it was the stupid lockdowns. It was the government mandating and, and that really super disrupted, uh, certain supply chains. So that's had knock on effects and, uh, and housing for some reason. Uh, I think mostly cuz the mortgage interest rates are going up. Housing is just frozen. Now. I don't think it's as bad as it got in 2008 where there were massive, uh, loan defaults and foreclosures and house prices collapsed almost 30%. Remember, uh, people remember that. I don't think that's gonna happen this time. But the last numbers I saw the housing sectors doing very badly home builders have stopped building. Uh, some mortgage companies are going under, but the Morg, the 30 year mortgage has risen from 3% a year ago to seven. That is a huge increase. And that makes people not borrow who otherwise would take out a margin, go get a house they're waiting and waiting means no production. So I would name those two Jennifer, um, energy and housing.
Speaker 0 00:53:25 All right, well we're coming up to the top of the hour. I know Richard, you are getting ready to, uh, to join your colleagues at the competitive enterprise Institute dinner. Any final thoughts before we go?
Speaker 1 00:53:37 Yeah, I would just wanna reiterate the uh, the point I made earlier, especially to younger people. I remember I did get this advice when I came out of college in 1981 and started on wall street, it was a recession. It was a really bad recession. And before I got my first job, I remember saying to my father, as I, he asked me, you know, how's the job search going? And I was reading the wall street journal and I said, wow, there's a really bad recession. And I don't know, it's gonna be tough for me. And he really got angry at me and I'll never forget this. And he said, what's that good to do with you? I said, what do you mean? He said, what's the recession got to do with you. You have great prospects. You just came out of a great school. You're a confident guy.
Speaker 1 00:54:22 You know, the, his line was, there's always room for a good one and I'll never forget that because I, it be, it dawned on me that, you know, we have our own little universe and even though things can go badly and they were, I mean, I went down to New York and it had only gone bankrupt like five years earlier, 1977 or so. And the place was a mess and there was a strike. I remember I went down there in summer of 81 and there was a, there was a, uh, garbage truck strike. The stuff was piled up in the streets. It was awful. The subways weren't running, they had no air conditioning. Uh, fortunately in the subsequent decade due to Reaganomics that the city just came alive and it, and it prospered. And I was, it was wonderful being there for that. But I, I leave it at that every time I talk about recessions or these macro things, I, I want to be aware of the fact that it's really important.
Speaker 1 00:55:14 What particular career path you're on, what sector you're in, what company you're working for. And you do not necessarily have to worry about these. I mean, it's terrible to have the economy in recession, but the economy is a huge abstraction. What you, what really matters for each individual person is your own economy, so to speak. And you can always do something either to look for a better job or, uh, you still should pursue your passions. Like I would never leave an industry, you know, because it was in recession. I, I was in banking when they were banking crises and it was still worth being, and it was still fun as long as I had my job. So, um, that's, I would leave on that note, Jennifer, that is always fun and interesting to talk about these macro things. But, um, personally, you know, from the standpoint of our philosophy, it's always important to remain optimistic and, and, and look for ways to grow within, uh, of the economy.
Speaker 7 00:56:14 Good stuff. All
Speaker 0 00:56:15 Right. Well, I'm gonna toss it to Scott to tell us about what's coming up next. Um, we also pinned up here, the link to the gala. It is precisely three weeks away in Malibu. Uh, just got off our gala planning call and it's really gonna be spectacular. It's gonna be under the stars with the big, beautiful stage we're honoring Michael sailor. Uh, and, uh, prior to the gala, we're gonna have some panels with our faculty, including a panel with professor Salzman and Michael sailor to talk about Bitcoin and cryptocurrencies, uh, in an age of, um, Fiat currencies. So, uh, that's going to be a lot of fun. We'd love to see you there. And meanwhile, we've got a lot of great events coming up.
Speaker 6 00:57:04 Great. Yes. Thank you. Uh, Tuesday at 4:00 PM. Eastern Lawrence and I will be hosting a happy hour here on clubhouse. Then at 7:00 PM Eastern Tuesday, Rob Tru Zinsky will be doing and ask me anything. Uh, Wednesday at 4:00 PM. Eastern professors, Jason Hill, and Steven Hicks will be on several different platforms discussing current events, uh, Thursday at 4:00 PM. Eastern back on clubhouse Atlas society, founder, David Kelly will be talking about Cardinal values and Friday at 5:30 PM. Eastern on clubhouse. Uh, Jason Hill will be back discussing I Rand versus NCHA. So, uh, that should be a fascinating discussion as well. Uh, like you said, we've got the gala coming up. Lots of good things. Um, you had a great interview with Zubi this week as well, so, um, yeah, it's, uh, fun to be part of the Atlas society's growth and, uh, Richard. Great, Joe. Thank you. Uh, thank you all. Thank.
