 Hey Radio Rothbard fans, the Mises Institute has a new free book for you, Dr. Guido Hulsman's How Inflation Destroys Civilization. Learn how inflation isn't only making us poor, it's harming our culture, meant a well-being, and the moral foundations of civilization itself. Get your free copy today at Mises.org-slash-rothpod-free. Hey guys, this is Though Bishop with Radio Rothbard, and if you're listening to this show, you're no doubt familiar with Human Action, Ludovon Mises Masterpiece. This is the 75th anniversary of its publication, and in honor of that, we are holding a very special event on May 16th through the 18th, a conference dedicated to this very important book. We're going to have scholars from all around the world coming in, including Bob Murphy, Guido Hulsman, Joe Salerno, Tom Del Renzo, a whole list of all-star Austrian scholars. Now as a Radio Rothbard listener, we've got a special opportunity for you. If you go to Mises.org-slash-r-r-raffle, that's double r-raffle, you can enter in to get a free admission to this very special conference. So if you're a student, we've got scholarships available for you at the event site, Mises.org-slash-events. So I hope to see you guys there, and now enjoy the rest of the show. Welcome back to Radio Rothbard. I'm Ryan McMacon with the Mises Institute, and with me, of course, is my co-host, Though Bishop. On today's episode, we are welcoming back our senior fellow, Mark Thornton. It's been a couple of months since Mark's been on the show, and we have him on at pretty regular intervals, because he keeps up with a lot of the details about the economy and economic trends with his podcast, Minor Issues, and if you're not listening to that, I recommend you do so, especially since it's nice and short form. These are from like six to eight minutes, usually, and a real easy way to keep up with the economic news, and especially those data points like jobs, economic growth, that sort of thing, GDP. So we're going to talk about a couple of the issues, I think in a little bit more detail from some issues he's brought up in some recent episodes of Minor Issues. And to lay the groundwork on this, I think we want to talk a little bit about your episode from February 17th, the Fed versus the real economy. And I don't think all of our readers, I think many people have a sense of this, but not everybody is quite familiar, at least not in terms of the vocabulary. I think people have a sense of what it is and what it means, but this difference between the financial economy and the real economy. And what do we mean by that? Just looking at some of the details on how the Fed seems more concerned with the financial economy than the real economy. A lot of this stems from the Fed's attempt to buoy the stock market from what we see in a lot of cases. And so let's look at a couple of issues related to that. For one, can you just give us the real basic definition then of what is the real economy and how that differs from what we might call the financialized economy or something similar? Yeah, the real economy is you and me and everybody going to work, going to the store, buying stuff, selling stuff, providing services, all of that kind of thing. And we look at the measures in terms of things like the labor market, inflation, of course, business activity, investment, confidence, all of those underlying measures of economic activity. Richard Cantillon called, there was no word back in his day in 1730 for the economy. He called it the circulation in which we are all circulating, goods and services are circulating and money is circulating. And government is out of that picture because government just steals from that circulation and consumes. So the real economy is something that is real and true and something we should all be concerned with. And so we look at the factors of how much debt people are getting into. What's their financial position? What's job prospects look like? There's been a big decrease in job openings in the economy. They talked about that incessantly last year in 2023 that there's 12 million job openings that the number of jobs are always and everywhere fully abundant and that figure has fallen by 25% in the last couple of months. I expected to fall more and I expect the labor market statistics to get worse and of course what we've seen and what you've pointed out, Ryan, many times is that they announce some labor statistic and then it gets revised over the next several months and it's always worse and worse and worse. So reporting is an issue but we want to be focused on the real economy because the financial economy, the stock market is something that can be rigged by the government and specifically by the Federal Reserve. They're obviously in a position now where they're actively managing confidence in the stock market which helps them manage confidence in the real economy. What people's opinion is, the media is no good here because one of the things I've noticed is that until last week the stock market in terms of the S&P 500 index had set new records for 16 straight weeks and the financial media was just continually bragging, smiling, laughing about that particular set of records and it was on their tongue with every question and with every answer we've got 16 straight weeks of new records. Well, the record setting stopped last week and I'm not saying this is a massive reversal and trend but this week the price of gold set an all-time record high and crickets didn't hear a word out of the media and then this morning very early before the main host got on the Bloomberg TV show, one of the junior hosts mentioned, well, gold set a new all-time record and it's been up six straight days, what do you think of that fellow co-host and the fellow co-host didn't want to talk about that at all, just went off into another subject matter which was how strong certain stocks were in the marketplace so you got to be very careful about your sense of how well the stock market, the financial markets are doing and there has to be a link however distorted between that part of the economy which is just one part, it's an important part and the real economy where you and I and everybody else has to live, work and survive. Yeah, it's really quite remarkable how much stock is being put in the stock market in terms of using that as some sort of measure of the larger economy and that's always been a bad idea, right? And I do remember back during, I worked for the government back in 2009, 2008 and this was when the economy was collapsing, all these bailouts taking place and yet of course the stock market turned around quickly even though the employment situation was terrible for years afterward, the employment situation didn't really improve until about 2012, 2013, especially if you were a younger worker and yet the stock market was gangbusters because of course the Fed was feeding tons of easy money into the stock market and you had tons of people that I worked with, like the guy who headed up the division at that time saying, hey, the stock market's great today, quit telling me there's any problems with the economy. And I just thought, wow, people really even educated people believe that the stock market is the proper measure of how the economy is doing. But even now market, it's like, even if it was wrong before, it's super wrong now because so much of the stock market is really being fueled by just a very small number of stocks that are doing very, very well. It's really quite remarkable to watch. So no longer is the stock market even a reliable measure of just those stocks that are in the index itself because you could have tons of say real world manufacturing stocks doing terrible. But oh, we've got a small handful of tech stocks that are doing really, really well and they're pulling the overall index up and everything's great. And the example I think the big example of this right now is the so called magnificent seven stocks, which you've mentioned in a recent episode. And these are stocks like Tesla, Apple, the big one is NVIDIA. I don't know if I'm even saying that right. I've never actually heard a pronounce. Yeah. And I mean, huge gains over the last few months. But does this translate into overall economic strength? And so this doesn't even tell us much about the other companies in the index, let alone the economy overall. So the amount of centralization has just become quite remarkable from what I can see. Yeah. The in 2023, the magnificent seven represented the entire gain of the stock market that year. So absent the magnificent seven, the rest of the index was flat for the year. But this is the nature, the psychology of a bubble economy. And it certainly looks like the stock market is in a bubble to me. And bubbles like this have to suck in all the energy and all the money and credit from wherever it's possible to bring it in. And so investors have rushed into these stocks, artificial intelligence and so on. Foreign investors are coming in in incredibly large numbers because stock markets in other places of the world are doing either okay. There's a few bright spots, but a lot of them are not doing all that well. And so it's sucking money in from overseas. It's sucking money from other sources domestically and it's moving a lot of investment money from other stocks, especially anything that any stock that isn't in some index or is just a minor component of an index like small caps are not doing well at all because all the money is going either into the magnificent seven or going into electronically traded funds ETFs in the S&P 500 or in the NASDAQ 100 or in one of these magnificent seven stocks. Now, of course, Tesla has fallen off lately. So it's really the magnificent six. We might see some other of the magnificent ones falter. And of course, the big dog in the in this whole show is NVIDIA. You know, NVIDIA is the leading maker of the newfangled high potency computer chips that is supposed to be necessary for running computing capacity in terms of AI artificial intelligence. And so anything you know what we saw last year in the beginning this year is anything that you could somehow label artificial intelligence. It just went straight up. And so the way I see it right now is that it is a bubble and that NVIDIA, which actually made a name for itself as a video game company, it produced the chips and the video cards that make playing video games much more fun. OK, so you can see the characters better and they move around less clunky. If you're using a system based on the video's chips and video cards. And so really what our economy is depending on here is a video game company. And all these people on Wall Street who don't actually play video games are leading the charge in all of this. So as far as I'm concerned, it's a little bit of a tenuous, a little bit of a scary situation. One, of course, this gets to a much broader issue here is that this is not a we're not bashing the stock market itself, but what the stock market has become. And one of the big problems here is that again, it's a lot of it is chasing trends. We've seen this massive sort of move, I think, particularly within this period of hyperfinancialization after 2008, where wealth management is far more important than value creation to that real economy. I'm not going to try to dismiss the value of NVIDIA chips and the like, though the bubble concerns there, I think, are valid. But when you've had such a large reliance upon stocks as a reliable vessel for investment, again, within this period of easy money, that not only leads to, again, I think dangerous allocations of capital, again, moving away from that real economy but to these products. But you also have a massive political dynamic here where you have particularly older generations that are more invested in the stock market. They have the resources to do it. I mean, that's one of the reasons why the stock market is such a politically potent indicator of economic success. Because if number go up, if people feel richer, then voters who still at this day are going to be largely representative by older generations. That is exactly the sort of group that politicians are going to try to placate the most. And so, this is State of the Union week. And I'm sure we're going to hear a number of times of Biden pointing to the stock market as a measure of how great this economy is going. It's kind of ironic because at the same time, they bash corporations for their greed on pricing and things like that, you know, attributing inflation to massive profits and these corporations. And yet, a big part of that, their profits are driving the stock market, which is going to be bragging about again, I'm not acting shocked here that we have a hypocrisy or economic literacy coming from the political class. But that dynamic too is the political potency of the stock market as a tool, again, with an increased reliance upon it in the current system is a whole another dynamic of again, the real economy being shafted at the benefit to the benefit of the financial economy. That's a really great point. And it's a really important point. The stock market, you know, is the Fed manages the stock market, and they want confidence in it, they want to drive down the cost of the input, which is credit, low interest rates, and any kind of financial formula. If you lower the interest rate, you raise the capital asset value of capital goods. And the problem, you know, there's many, many problems with that. But I think one of the things you're getting at here is that if this is a massive bubble, and the bubble bursts, and the bubble completely deflates, you've got a very large segment of our population that is about to retire or has recently retired, or has retired within the last several years, that have been able to do that because of large increases in the value of their IRAs, their 401ks, their investment income. And one can only imagine that these people, and of course, again, this gets back to the bubble psychology, they people think that, yes, the stock market is related to the real economy. Whereas in the past, that wasn't necessarily the general belief amongst people. But if it was to completely deflate, these people's retirement would take a severe, you know, severe damage in a bloodbath like that, and they would be up in arms, politically, they would be complaining to their congressman, their congressman would be complaining to the Fed to do something. And given what they've done already, given that they would be the cause of this financial massacre, who knows what they would be willing to bring forth given that they've done so much unconventional, untried magic tricks over the last 20 years. It kind of unnerves me a little bit about what they would do moving forward to quiet that class of people who are recently retired. Well, and you notice, you noted in your podcast that the the narrative we get out of the media is that the Fed has really, really tightened rates and is in the midst of QT and really, really clamping down on inflation. But you note that, well, it's not really that tight. And I think we could look at that in a couple of ways, right? First of all, historically interest rates are not exceptionally high by any means. And certainly not compared to the 80s, when they attempted to deal with the 1970 style inflation. And then there's the other issue, which rarely gets mentioned anymore, which is the Fed's balance sheet, it's multi trillion dollar balance sheet, which it is rolling off at excruciatingly slow pace. If it wanted to tighten more, it could easily do so, but is not doing that at all. And you note that part of the reason for this is that the Fed is committed to keeping interest rates low. Partly, now we've noted one here, partly, there's a lot of political concern related to the stock market and the value of stocks and how that relates to the public's retirements and pension funds and all of that. But the other issue is, you note, well, the Fed doesn't dare really destroy the bond market by allowing rates to significantly increase. So can you talk a little bit also about that motivation of the Fed? So the Fed's got this issue with the stock market here. But it's got a couple other issues too. There's, first of all, the bond market, but there's also the fact that the banks themselves, a lot of them rely on portfolios filled with bonds and also with a lot of securities that may be falling in value if the Fed actually over-tightens. So then you got a bunch of underwater banks. I mean, what's the Fed's thinking on this? The Fed, it seems to me, the Fed's trying to keep banks afloat, while at the same time also keeping the federal government afloat with relatively low rates. I mean, how are they, what are they primarily concerned with? And how are they going to keep all of these dishes spinning in the air? Well, with respect to whether it's easing or tightening, you know, inflation is at over 4% right now. And the basic government rates that the Fed really controls are up 5%. So a real interest rate, an inflation adjusted interest rate is less than 1%. So that is not tightening. A 5%, 6% rates are not historically tight rates. As you mentioned, they're supposed to be reducing their balance sheet by selling off assets, which would be tightening, but they really haven't done much of that. That's really a small percentage of their balance sheet that they've actually sold off. The one area that they've really manipulated is the reverse repo market. And I don't want to go into the details because it's like a card game trick that they play. But basically, when they crashed the market in 2022, 23, they were creating these reverse repo agreements with financial institutions, which basically took money off of the investment table and put it with the Fed. So there was tightening where they basically created $2.5 trillion, $2 trillion of new reverse repos. They took that out of the marketplace and stock prices went down and bonds also suffered as a result. And once that started hitting the real economy, they had plateaued in that marketplace and then they began to ease. And they basically returned all of that financial capital, that cash or that credit to the market to the tune of almost $2 trillion. So when they started to return that money, that's when we saw the stock market start to re-inflate. And so it's, you know, if there was any tightening at all, it happened a ways back. And since then they've been loosening the stock market increases are not really the result of basic fundamental financial results, but they're basically the result of a new flood of $2 trillion in credit. And so in terms of what they're most concerned about, and I think why they reverse themselves on reverse repos is that the market that they have to be most concerned about is the ability of the government to sell government bonds. That's what they're in the business of manipulating. That's their primary business of manipulating that. And of course, the government's, you know, their ability to overspend by trillions of dollars a year is of course, directly tied to the ability of the Treasury to sell government bonds. And a lot of things have been going the wrong way for that market. And there was a lot of scary situations last year in particular. But of course, that's what everybody's focused in on is on a day to day basis is what's happening to the interest rate on government bonds. And that's a very big problem for them. That's that's something that if they were to lose control of, in other words, if the interest rate were to rise significantly, people didn't want to buy government bonds. And of course, we're seeing, you know, the Russians aren't buying, the Chinese aren't buying their selling. There's a reluctance on other central banks part to invest in US government securities, they're investing more in gold as a result. So that's the thing I think they are most concerned with, because if they can't sell those bonds and the interest rate has to go up, then the interest expense on the debt is going to skyrocket even further. And that's going to look really bad for the US dollar. So these things could, if they develop in that pattern, they could feed on themselves. And so the Fed has to backstop that whole process. That's the problem too is that the end and this goes back to the importance of the real economy is that, you know, the economic system we have right now is essentially a house of cards. The the issue on the physical side and spending and the reliance it has on very accommodative monetary policy is a major problem. The extent to which the last post 2008 economy, you know, all sorts of institutions are reliant upon the gains made in the stock market, you know, not beyond just individual investments, but pension funds and insurance companies alike, right? The reliance they have on blue chip stocks that help make up yield that you would traditionally, you know, could be relied upon with more conservative investments like, you know, traditional bonds. The way out of this, right, you know, if we're looking at what healthy economic growth lies upon, it is, you know, major advances within the real set, the real economy, right? It is new innovations that are going to create entire new industries and the like. It is great efficiencies being made so that new goods and services can be provided at a cheaper and cheaper price to help expand the market for that. And we have so much of the capital allocated towards getting kind of these more wealth management oriented dynamics. Or, you know, now you have people kind of desperately hoping that things like AI, or you know, just kind of unicorn projects that big tech has the metaverse being an example with Facebook, is that you have these large tech companies that, you know, have been seen as safe havens as generators of innovation, you know, they've had a lot of misses like the metaverse with Facebook. Again, a lot of hope, I think, for what AI can do, which is not to say that there's not real value there and there's not going to be real real advances made that help improve things on the within the real economy, but a lot of that might be wish casting on what they hope to happen there. And so, you know, the economy where again, you know, this, this goes to the critiques that people like Peter Thiel have made that, you know, back, you know, decades ago, right, we were thinking about, you know, flying cars and instead we got, you know, 240 characters on Twitter, which is obviously now gone up a great deal since they almost took it over. But it's the willingness to think big and to think about real stuff, real changes that can improve the lives of Americans. It seems that that is being taken a second place to this larger dynamic of kind of wealth management. And part of that is because we've created such a dangerous environment where you know, there's all this, you know, concerns about, you know, debt and the solvency of the banking system, we can't have real savings rates, we can't have kind of the core fundamentals that are required to create an environment for real economic growth. And so everyone's kind of just accepted, you know, low real growth in the economy, you know, we've, we've, you everything that is being used to justify and to promote strength, you know, relies upon this, this, you know, various methods of gas lighting that we get from the government in terms of, you know, inflated jobs numbers and all these sort of things. Real people are the ones that aren't feeling any real gains from a material perspective for all this money sloshling around in the economy that the government's convincing us is so great. Yeah, the I think your use of the phrase house of cards is great. And it's never been as appropriate as right now. Directly, consumers are adding to their credit card debt. In my last podcast, I mentioned that consumer consumers credit card debt had gone up by 25%. And I only I didn't realize I was only using the fall of 2023. And fortunately, the producer put that right in the headline of the episode that it's actually gone up tremendously to 1.1 trillion, more than double the increase that I had talked about actually in the podcast. So that's a card. The federal deficit is a giant credit card. And it's totally out of control. It's barely recognizable as a budgeting process at all. They're just spending without any constraint regarding revenue, future revenue, potential revenue, etc. And then of course, commercial real estate is also one of those cards where those commercial real estate projects, their financing is going to run out each project, the financing runs out and you have to refinance on a five year basis or a seven year basis. And a lot of those projects with fewer tenants than they expected, we don't know what's going to happen there. So there's a lot of cards being used in terms of more debt. And that's not a good thing financially. But in terms of GDP, the government's headline number, it works out just fine. Every time you use a credit card, even though you might not be able to pay it back, that still goes into GDP. The federal deficit, it may not whatever they're spending the money on, it's probably not worth anything to you and me or the people of the United States. They may not probably won't be able to pay it back, but it still goes into last quarter's GDP figures. So it is really a house of cards. And it's a great phrase right now. It's a phrase I've used in the past, but it's never been more appropriate than it is right now. And at the top of that house of cards is GDP, which continues to be positive. In the United States, it's much weaker around the globe. China right now is taking a lot of flak for forecasting that they on the basis of the massive stimulus program that they're starting that their GDP is going to grow by 5%. Now 5% would have been incredibly low 10 years ago, or even 20 years ago. But now it's much higher than anybody anticipates actually occurring in any kind of legitimate way. And they're being attacked for overstating or over projecting their GDP. But all of these things that Austrian economists worry about and regular financial people, regular accounting people worry about it too. All that gets plowed right into GDP figures and it makes everything look hunky-dory. So I think to wrap up then, since we're talking about cards, but we'll have to modify our card analogy a bit. I want to go back to one of your other episodes from Minor Issues where we talk about, okay, what are the wild cards that could be dealt to us that will trigger maybe a burst in the bubble or something that will cause the the malinvestment to really appear that will basically trigger a financial crisis of some kind or really make a recession apparent. And I suppose you could call these black swans also in a certain sense. And you clarify, right, we're not talking about wild cards in the sense you want to be dealt one because it helps you. We're talking about anti-wild cards. These are these are unexpected events that occur that really bring about an economic calamity, not all by themselves, but they're that they're that proverbial straw, maybe that breaks the the economy's back for the current cycle. And you note, many of these past events, including things like Enron, or when we found out during the global financial crisis that the ratings agencies that their that their ratings were garbage. And we found out these things in very unpleasant ways. So looking out and peering into your crystal ball mark, what do you think are some of the options on the table for what some of the the upcoming anti wildcards might be? Well, the funny thing is that some of these are occur very regularly, like regulatory failure, the regulatory agency agencies are supposed to be monitoring all this economic and financial activity fed and the FDIC and the Securities and Exchange Commission, all of these agencies, hundreds of thousands of regulators, but they regularly fail to alert the public to these underlying problems. The other one that typically fails in recent decades has been the rating agencies. Back a long time ago, when I was in college in the Middle Ages, the rating agency sold their services of rating bonds and securities to the investors to the buyers. And because of the way the federal government has flipped all that through regulatory requirements, the rating agencies don't work for the buyers of these securities, they work for the sellers. And so if somebody wants to sell a bond into the market, they go to a rating agency and say, look, look at my bond. It's really good. Don't you agree if I give you a million dollars? And they say, yeah, it looks really good. Give me the million dollars. So that market has been upended by federal regulation, and it's undependable. And it's certainly undependable. During the tech stock meltdown, obviously the financial crisis, and, you know, and subsequently, and I think that that's a big potential problem. Then there's a trade war, you know, the world is in a simmering trade war that could break out. Actual wars could break out. The United States is involved in conflicts in Eastern Europe with Russia as a proxy war in Ukraine. NATO is getting involved more and more countries are getting involved. More and more countries are joining or trying to join NATO further threatening Russia. The Middle East is a similar proxy war of the US and Israel against Iran and its subordinate groups around the Middle East. And then of course, in Asia, the trade war between the US and China, the two largest countries in the world, they're highly interdependent with one another. So there's the potential there for a smooth, holly type tariff war meltdown between the two largest economies that are highly interdependent as a result. And so in all of those areas around the globe, there's a lot of problems. I have a feeling that we're, you know, it could be anything right now. I mean, anything seems to sell the American public so that, you know, it could be a canal problem that's that sinks the world economy that the Suez canal is being blocked by a primitive tribe of Hutu rebels somehow mysteriously and, you know, the global the global weather patterns have changed so that the Panama Canal is drying up. So two canals to check choke points are potentially going to be sold to us as the problem, you know, that this magical problem that shoots down the entire world economy. So it's, you know, I'm open to suggestions really. But I wouldn't be surprised that it wouldn't be necessarily just one of the traditional anti wildcards, it could be really anything as an excuse, for example. Sure. I mean, it could be Putin's financial crisis, just like it was Putin's inflation. And of course, we were told, right, that inflation was just a result of their logistics was no good. So that's causing the inflation. Yeah. And of course, global warming, that could be the cause of anything. So yeah, we you're right, we should just be prepared for anything on those on those grounds, I think politically. Yeah, when if we think from the perspective of, you know, where are the crises that could be allowed to happen that would benefit the larger agenda of the regime? This again, I think is where the concerns about commercial real estate and the health of regional banks is to me one of the biggest red flags out there. Because if the goal is to further empower the state over the financial system, nothing does that better than the consolidation of the banking industry. And so we talk about the red flags early in this episode about commercial real estate, those are largely held in regional banks. If those are allowed to face stresses that larger firms do not, then and that results in more people taking their money out of regional banks and putting it with JP Morgan or Goldman Sachs or, you know, branches of those those banks, then hey, the Fed, you know, everyone wins from a from a DC perspective. And it's the further consolidation of that power. So I think that's definitely one of those, you know, we are we are getting in the month where the the training wills safety, the bumpers in the lane that were created after Silicon Valley Bank are being allowed to be allowed to deflate. That's the one area where I'm particularly looking for because again, a crash in regional banks only helps serve some of the long standing goals out there. So that's definitely one of things I'm most concerned about. Yeah, I think I think you're right, though. And I think that our side is winning against the global reset, the World Economic Forum and all those crazy people. I think you see that in elections around the world. And I think they're very nervous. The global climate change agendas in trouble. And, and, you know, this would be something where they could bring together economic collapse and military confrontation as a justification for some sort of world government intervention and to start the process towards the global reset. And, and also, you know, central bank digital currencies. I think this opens the door or potentially opens the door for them to get back out in front. Because right now they've suffered in my mind. I don't really follow it all that closely. But in my mind, I see governments around the world being elected in opposition to that global world government new world order, crazy agenda. And so this, unfortunately, could open up the door for them to move their agenda forward. All right, well, with that, we'll go ahead and wrap up this episode of Radio Rothbard. Thank you, Mark for joining me and so today. And yeah, we'll have you on again in six or seven weeks, just to check to observe the latest in the current train wreck and how it unfolds. And so thank you. Thank you, so thank you, everyone for listening. We'll be back next week with another episode and we'll see you next time.