 Our guest today is Dr. Robert Murphy. He is a PhD in economics from NYU. He's president of consulting by RPM and he's a senior economist. He's the Institute for Energy Research. He's also author of hundreds of articles, including one of my favorites, the politically incorrect Guide to Capitalism. And he's a senior fellow at the Mises Institute teaching online courses there. So Bob, welcome to our show. Thanks for having me, guys. How's it going? I hope you feel honored. This is the year that our first guest in our new studio here. This is taking months of logistics to take place. And you're kind of a hard guy to get a hold of. You've been doing a lot of traveling, I know. Yeah, yeah. So I'm glad to be here with you guys and congratulations on the new digs. Thank you. By the way, you're teaching a course at Mises in later April on how the government wrecks the economy. What a wonderful topic Bob. Yeah, very timely. Give us a preview. Let's get into that a little bit. Give us some of the high points of maybe some of the topics you're going to be discussing and what are our appetite for this class? Sure thing. So yeah, it's going to be a six-week course. And if people want to see it, it's at academy.mises.org is where they can get all this information. And it's what I'm doing is going through the final third of my textbook called Lessons for the Young Economist. And the PDF of that is available online for free if people want to look that up as well. And so I just walk through what this is. It's supposed to be a textbook. It's suitable for people as young as junior high, but even adults who never really studied economics say they get a lot out of it. And I just walk through some of the main points as to why government intervention, as the title suggests, wrecks the economy. So it starts out with just pure socialism and gives the theory as to why socialism doesn't work, and then reviews the historical record, which a lot of people just have never been taught this. Just literally the body count of socialism the 20th century is in the millions. And I don't even mean just like in a war. I mean, like socialist governments purposely killing their own people for political reasons. The body count is in the millions. And so we just walk through that. And then in the final section, we just go through some standard things that happen even in Western democracies, like price controls, minimum wage laws, rent control, drug prohibition, just the economics of that and explaining why it is that there were gangsters involved in the alcohol trade when alcohol was prohibited, that sort of thing. And then we also wrap up with some more complex topics, namely inflation, like where does inflation come from, and the causes of the business cycle. And so there I give the Austrian school approach, saying that it's actually the central bank's manipulation of money and banking that causes what we refer to as the business cycle. Well, let's talk about one particular topic, which is why socialism doesn't work. Misi is very clearly laid out a totally different philosophy than the Keynesians, which is you can't do calculation. You don't have any pricing discovery mechanisms in socialism when there's just massive government intervention into the marketplace. The Austrians differentiate that very distinctly. But how come the Keynesians think they can get away with some of these faux forms of socialism we see to be creeping toward? Well, you're exactly right that this goes back to and that's what I talk about even in the book. Of course, I try to use language accessible to was lowest junior high students. But it is drawing on what was it's called the socialist calculation debate and that occurred in the early 1900s. As you mentioned, Ludwig von Mises, he sort of launched this new salvo in the war between the market economy and socialism, because up to that point, the debate had been over incentives. People who were opponents of socialism as it was being propounded in the late 1800s were saying, oh, come on, if people are just getting their cut out of what the common pool, well, then why would anyone have an incentive to go to work? And that sort of thing, which is all very, very true. But Mises said that's not the fundamental problem that even if all the comrades in a socialist society just obeyed their orders with enthusiasm, still socialism doesn't work because they lack market prices in the means of production that basically businesses and managers can't engage in a profit and loss calculation. And so they would just have no idea if they're efficiently using resources. They could look and see, okay, we're having this much steel going, this much rubber, this much electricity, an ounce pop in this many cars per month, but they would have no way of knowing, should we keep doing this or is this wasting our resources? Because that's what the profit and loss signals give you in a market economy. And so to answer your question, I think the reason that Austrians are more attuned to that sort of problem, whereas Keynesians would not be, is that in the sort of mathematical models that Keynesians typically use to describe the economy, these sorts of issues don't come up because if you just have a few variables in there and you're modeling the economy is just a big pile of capital and a big pile of labor and there's a simple mathematical function, combining them to give you the output, well then it's easy to have a government official tweak things and make it better than that silly old market will do. But when you get more realistic about how things are in the real world, then you see the essential role that market prices play in why you need profit and loss accounting to help guide entrepreneurs make the right decisions. Well, I think we're seeing that in the market today with quantitative easing. We have massive intervention into the credit market, sending signals to entrepreneurs, many of which have made malinvestments from these signals because of the government intervention. I think the housing crisis was a perfect example of that and it blew up in the Keynesians' face. Yeah, I think you're exactly right. And perhaps one way of putting the matter is to say that when you see people nowadays arguing over the effects of quantitative easing and so on and the Fed's zero interest rate policy, most economists, especially the Keynesians, will say, well, look at CPI is not going through the roof. And so therefore, obviously, there's no fallout from the Fed's policies. And as they think, the only bad thing that could possibly happen from pushing interest rates down to zero is that prices might start rising too rapidly and that kind of messes things up. And so they realize, oh, well, if you're pushing the gas too hard and you overheat the economy, when the Austrian is having a much more nuanced view and realize that the interest rate serves a very important coordinating function. And if the interest rate is supposed to be 3%, but instead it's 0.25%, that's going to screw things up. Entrepreneurs are going to make the wrong investments. And so it's not just a matter of some aggregate CPI that the BLS puts out and what's the percentage change of that. That's a very crude thing that the interest rate is just a market price. And so if that's the wrong number for several years in a row, that's going to screw things up. Yeah. And for me, Robert, it comes down to trust as well. We had a gentleman on the program a couple of weeks ago talking about, actually he worked for the Bureau of Labor Statistics. He was more on the employment data, but was talking jobs data. And he said, you know, a lot of times this stuff is cooked and those numbers are slightly tweaked to fit the agenda. So even though we have CPI and PPI data coming out for the BLS, we'd have to raise your eyebrow and say, well, what exactly are we getting here? Is this economic data really enough to make a long-term investment on or an economic decision or even from an entrepreneurial perspective to grow my business based off these numbers when they may not even be true. So let's take a quick break. I'd like to dive into that when we come back after this short break. Also, we had a listener question. I'll just kind of set this up here to give you a commercial break to think about it. The gentleman was saying, look, the Keynesian economics that we have right now, their banks, they went out and bailed out the big banks and they did a great job because if we didn't do that, we'd have a huge collapse of the financial system. So why is it that we're so, I guess, anti, not anti Keynesian, Keynesianism, but pointing the finger at the Keynesians and saying, look, you're doing things wrong. Why would it have been better to potentially have let these banks fall apart, go, kind of fix the problem on their own organically and maybe do an Austrian approach? Well, look at that week of back. Our guest today is Robert Murphy. John O'Donnell is here in studio with me. If you have questions for Robert, John or myself, Power Blast is out of power at tradingradio.com. We'll be right back after a short break. Welcome back to Power Trading Radio Live and your host, Merlin Rothfeld with today's special guest. Hello, everybody. Welcome back to Power Trading Radio. Merlin Rothfeld in with John O'Donnell for our weekend edition. Our guest today is Robert Murphy and Robert, I have a couple of questions. One, I set up before the commercial break there, which was we had a listener a couple of weeks ago sent in a question and obviously we're an Austrian friendly show. I think that John and I both believe that there should be a cleanup of the ramp and spending and just kind of look at the way we're doing things from a government level on down and fix that before we start continue down this path of just reckless spending. And he said, look, the Fed, the government bailing out the banks, bailing out AIG, bailing out General Motors and all these companies was a great thing to do because now look, we're back on the road to prosperity. But what we've done in the meantime is amass an incredible amount of debt and encourage people to build up businesses and fail. And we kind of raised the issue. Look, that wasn't the right approach. I'm curious from your perspective, what would be the Austrian approach and what might be the benefits of it? Sure. Well, I think what I'm going to say is compatible with what sounds like how your position has been. The standard Austrian view is to say that the government has no business picking winners and losers. That as of, let's say that when the crisis fully manifested itself in the fall of 2008, yes, things would have been bad if the Fed and the federal government had just stood back and done nothing. But the point is that's because real mail investments had been made during the housing bubble that people had invested improperly. And so of course, people are going to slap their heads when they realize that and say, oh my gosh, we're not as wealthy as we thought we were. We made a bunch of bad mistakes. And so you don't undo those mistakes by having the Fed create a bunch of money out of nothing and buy up those investments and then bail out the people who made the mistakes and have the federal government borrow a bunch of money and spend it on political projects. You don't help anything. You don't make the economy richer by doing those sorts of things. So what would have happened, there would have been a short-term crisis and it would have been bad and unemployment would have gone way up and a lot of businesses would have gone under, including a lot of the major investment banks. But there would have been bankruptcy proceedings. Real resources would not have been destroyed just because a company goes out of business. It's just the creditors would have divvied up the assets as best they could to pay off the bondholders and so forth. And the primary benefit of that is that the companies that had been responsible during the housing bubble years, the ones in the financial sector that sort of didn't get too aggressively involved with mortgage-backed securities because they knew, we're gambling with fire here, let's just not get too heavily involved with it. This surely isn't going to last. Those firms then would have had dominant market share and so the system would have worked. It's a profit and loss system and the lesson would have been learned that, okay, yeah, the next time a bubble comes around, you don't want to get involved too heavily because look what happened to all those guys that got crushed in 2008. But now the lesson is, you got to go ahead and pay huge bonuses and get in while the getting's good, when there's a bubble on the way up and then make sure you're politically connected so that you get bailed out if things blow up in your face. And that's hardly the lesson you want entrepreneurs to be learning. Yeah, I think the message of capitalism is there's a place for failure that the role of recessions and depressions is to and credit purging cycles is to wipe out the inefficient producers. People forget in our rail industry as an example, I did a recent paper on the history of the capitalization of our rail industry. We've had 2,000 bankruptcy procedures in the rail industry. We've had 300 automobile companies go out of business. There's a place for reorganization. I remember Merlin, remember when we had all the ISPs out there, we had hundreds of online brokerage firms that merged, purged, or failed and we've got a handful of them, about five that have emerged with maybe 70, 80% market share. But there is a place for failure in a capitalistic system, and that includes the banks. If Citibank had gone under, you don't think our country isn't overbanked anyway? Think about it for a moment. Somebody would have picked up, they would have went through bankruptcy, they would have cleansed all those credit instruments, secured and unsecured creditors, would have divvied up the spoils of the bankruptcy attorneys, would have walked away rich, and banking would have gone on in America. So I think there's a place for failure. It's a function of capitalism. The problem, and I think this is where you were going, Robert, is that there seems to be an improper practice of encouraging failure and rewarding it. Some of these guys took risks that were so stellar that was just unbelievable what they were doing. Their entire business collapses and they take down the general taxpayer with it, but they're the ones that get rewarded to just jump ship and be happy making their hundreds of millions of dollars and everybody else suffers for it. That to me is wrong and there should be some criminal proceedings against some of these guys that really knew what they were doing and brought their companies down willingly. Yeah, and also I think another important point to make in this is it's not that I'm saying, oh yes, the Fed and the federal government's interventions prevented a really bad adjustment process, but that offends my moral sensibilities. No, I'm saying that all they did was postpone it. We are still going to have a much and now a much worse day of reckoning than what would have happened in late 2008 had they not come in and done all those extraordinary measures. So it's not that they spared us the pain, they just deferred it and it's going to be that much worse. Yeah, because the concentrated risk now there's more deposits in the hands of fewer bank brands today than it was pre-crisis. So all I really done is concentrated the problem for the next day of reckoning. Yeah, I mean it just may this is a simplistic way of looking at it, but you know there was the dot-com crash in 2000 and around then 2001 and then they replaced that with the housing bubble and then that crashed and that put in jeopardy major investment banks and then I think the next crisis is going to be that the euro itself might go down. So now it's like whole currencies that are at risk and maybe the Fed will bail them out and so on, but so that each cycle the threat just keeps getting bigger and bigger. In 2008 if people said at that point what if we had just endured the dot-com crash instead of giving us the housing bubble? Everybody would have thought that would have been a walk in the park. So I'm saying the next crisis that's coming may make what was going to happen in 2008 look like a walk in the park. Yeah, well you know it's funny because we don't know what is coming although we can all have assessments of it. I think John believes that there'll be some big sell-off. I've been on the radio saying listen I'm guaranteeing a 50% drop in the markets. I just don't know when it's coming at some point. I think it's a natural flow. When we come back doc, let's talk about your perception or thoughts about what might be the big red flags that this market is in fact rolling over. I know we saw a pretty volatile week this week in the markets. Thursday and Friday was just brutal for those of you who are bullish in the markets, but is this the beginning of a much bigger downside move or are there other red flags out there that we can look for and start to build a bigger position or even start to go bearish in this market? I know some of you are probably still just holding those reins and being very very bullish out there. Well look if this sell-off continues, if this negativity persists and also if the institution selling which is what we're seeing a lot of right now continues, these markets could be much much lower going forward. So we'll look at that week and back with Robert Murphy after a short break. If you have questions for John O'Donnell or myself, Power Blast. It's out of powertradingradio.com or go out to Twitter. It's at Trader Murrow and we'll be right back. Hello everybody, welcome back to Power Trading Radio. This is our weekend edition. Our guest today is Robert Murphy and we were talking a little bit earlier about a class that he's going to be teaching April 24th. I would encourage you guys to check that out and TJ, if you wouldn't mind, bring up our screen over here. We've got the website. You can go to academy.mesis.org for a list of classes. Obviously a lot of other great classes as well. This one is entitled How the Government Wrecks the Economy, Pretty Reasonably Priced There Was Well. It's six lectures starting April 24th and continuing. Oh, that's interesting. We've got a totally different chart there. Huh, that's cool. There should have been this one. I don't know what happened there. But here we have the website for it again. Go to academy.mesis.org. It's called How the Government Wrecks the Economy. Robert Murphy will be presenting that one. So definitely take a note of that and attend that one. Robert, before the break, I was talking about current markets. We talked the beginning of the year on how we all expect just dramatic volatility. We're really seeing that happen here, especially in April. Pretty negative week this week. What are some of the signs? I know you kind of made it sound like there will be a day of reckoning. Are we seeing that now? Is this just a false little pullback here? Or do you see maybe some bigger signs down the road and what should we look for? Well, I mean, this very well could be the beginning of it. All I can say is I mean, I'm not claiming to be an expert in terms of timing, but I do think that to put it this way, there's no reason that the underlying profitability of American firms has increased that much since 2009. If you chart the S&P 500 against the Fed's balance sheet, you can see that this huge surge in stock prices almost moves hand in glove with the Fed's quantitative easing programs. And so if you don't think that the Fed creating a bunch of money and buying treasury bonds and mortgage-backed securities is the way to promote prosperity, then that should alarm you. And I don't know when it's going to break. So I guess one way of putting is I think that the dollar and the stock markets right now are in a bubble. And when does it pop? Well, I don't know. If everyone thought like I did, it would pop immediately, but obviously a lot of people disagree with my view. So one thing that I do think is going to make this illusion half the burst is if and when the commercial banks start expanding their lending again, because as I'm sure you know, there's a huge amount of what's called access reserves right now in the commercial banking system that they have the legal ability to lend that to make new loans in the quantity of several trillions of dollars, and they just haven't done that because there's no good loans to be made at this point. So if the economy ever does seem to be improving and the commercial banks start expanding their lending, well, then you're going to see tremendous pressure on prices so that the Fed's going to have to do something, raise interest rates, what have you. And then I think that the day of reckoning is going to have to come. Yeah, it's that day that I think so many of us are looking forward to. Well, look, there's going to be an in game. I think it's certainly gone on a lot longer. If we had this, we could have had a similar conversation in 2000. We certainly could have had a similar conversation in 2007 peak. I think it's gone on much longer than any Austrians expected that it could. I don't know what Murray Rockbard was thinking back in the day, or what Mises must have thought when we went off the gold standard in August of 1971, but he had to think, geez, we've got to be getting closer to the in game. But here we are, 40 years later, still having the same conversation. So, you know, I guess it's the way the market works. You know, Robert, I put your book up on my Twitter feed. You mentioned the book is called Lessons for the Young Economist. If you go out to at Trader Merlin, you can get the link to Mises.org where the book is there. It's a free book out there for you. I definitely encourage you to read that one. And again, hopefully see if we can get TJ to bring that image up. If this comes up here, it's called How the Government Wrecks the Economy. This is the class that will be taught online, April 24th through May 29th, six lectures. Robert Murphy will be the host of that one. And what's that URL? URL is academy.mises.org. I'll actually post it on my Twitter feed as well. So check out Trader Merlin there and we'll get to that one. So Robert, thank you so much for coming on the program and making it easy for us on our maiden voyage here at our new studio. Well, again, best of luck to you guys. Thanks for having me. Thanks. Hopefully we'll get you out here in California one of these days. Keep up the fight, Robert. Thanks. Yeah, love to come. All right, take care. Thank you for listening to the Mises Academy podcast to enroll in online courses to access other episodes of this podcast or for more information visit academy.mises.org.