 Hello everyone, it's a pleasure to be here for the big four zero the 40th anniversary of the Mises Institute I think it's incredible. It's a great honor to be presenting Leading the the lineup when I think of all the tremendous progress the country has made over the past 40 years We would just think about it in 1981 the average inflation rate was 9% and now it's down to 8.3% So that's I mean that's change you can believe in right Yeah, and I Again, as I said, it's it's a great honor to be speaking at this event and leading the today's lineup of speakers So at least there's no pressure on me right if I if I don't do good and if you guys are bored of my presentation I have good news. It's it's gonna be transitory. So only only last for a little bit So I want to talk today about Public enemy number one according to the Austrian school of economics and that of course is the the Federal Reserve the the big bad wolf right, so I want to spend a little bit of time Discussing the Fed discussing where the Fed's been over the past couple years What the Fed has predicted would happen what's actually happened what the Austrian school would say would happen and so on because This is a really important time to be knowledgeable about monetary policy Which is probably why the Federal Reserve has tried its very best to make everyone not very knowledgeable about monetary policy So instead I want to Clear the confusion out of the room and just get through the basics as to why we are where we are today All right, so I want to look at the Fed's report card over the past couple years I am a professor, so I am a grader. I have to you know give out progress Reports and suggest room for improvement and you know the Fed was recently Riding very very high after after COVID it was seen as doing a great job at solving the economic crisis that we were in You know in 2019 what I like to call the before times right to the period before COVID Unemployment was at 3.6 percent All right fairly low. It was partially due to demographic trends, but that was about the modern natural rate of unemployment Inflation is measured by the CPI the consumer price index was 2.2 percent. So right about target a 2 percent inflation target and GDP was growing Fine it was the past two quarters GDP growth had averaged about 1.3 percent so very Very good report card in 2019. So let's fast-forward to September 2022 The unemployment rate is 3.7 percent I don't know if you've seen the news today The new jobs report came out the unemployment rates actually about 3.5 percent And you can see for various reasons that I'll get into why stocks have been doing so poorly today after There was a false hope at the beginning of the week so unemployment. It's about the same Inflations at about 8.3 percent, right? So that's that's not good. Okay, that's that's that's about six percentage points above target, right and To add insult to injury GDP the past two quarters has been declining by about point six percentage points So normally if you read an economics textbook, which apparently is supposed to Contain the knowledge that we teach students did two consecutive quarters of declining real GDP is a recession But we're not in a recession We might be in a technical recession or a recession declared in a month or so or two months or so for various reasons That I'll get into so this is an F I would give the report card in September 22 an F the Fed has clearly done something wrong We're right back where we were with unemployment, but inflation is is raging and economic growth has been contracting So this is this is very clearly a see me after class Come to office hours perhaps for tutoring and I'm gonna draw I'll have to draw some supply and demand graphs using money supply and money demand So the the Fed has been doing something wrong Maybe they were taking online classes over the past couple a couple years So all right well what exactly is going on So what caused the the inflation if you talk to a Keynesian it's gonna be supply shocks We've seen this ad nauseam over and over again the supply chain bottlenecks and snarled supply chains There's shortages of computer chips. There's high food prices. This is Putin's price hike So we've been told so on and so forth and while this isn't to deny that there have been Some negative supply shocks over the past couple years. This is it's far too narrow It can explain a couple of isolated price increases, but not much more beyond that And if we go to a different school of thought the the the right key in school of thought led by Robert Reich This is due to corporate greed there apparently was this huge burst of corporate greed over the past two years Is all these monopolistic bloodsucking companies? I've decided to build the consumer apparently they were very Altruistic in the 2010s and all of a sudden there is this huge burst of corporate greed and while I'm not one to deny That there's been increased consolidation in industry over the past couple years I would point out that this is due to the regressive lockdown policies. We've practiced and even then This can only explain some price increases or it's really more of a reflection a symptom of the underlying cause So what would the Austrians say? What would what what explanation would the Austrians give for our current malaise and and I tried to find as Scientific of a graph as possible to explain the the Austrian perspective on this And this is what I came up with right? It's it's it's not exactly know as arc But it's close enough. You've got our Fed chair J. Powell. He's money is is raining down It's a it's a veritable flood of money and that's exactly what he's done. This this former partner or one of the Wall Street's largest private equity firms has Flooded Wall Street and the rest of the economy with money right over the past two years or really in 2020 and 2021 The money supply increased by 40 percent Okay, 40 percent right the big four zero. Okay, we haven't seen a two-year Increase in the money supply of that magnitude in modern American history. It's really unparalleled, right? Spending has gone up nominal spending of just people using this excess money and buying goods and services has increased by about 16 percent over the past Several years and this is far above average. Okay, so spending's gone up You print a bunch of money people are gonna go spend it so spending's gone up 16 percent and consumer prices during this time have gone up 15% Okay, that meant that makes sense right now. Now. Why is no one talking about this if you read articles? You might now occasionally hear about Expansionary monetary policy, but you don't really get into The actual process or no one talks about the money supply the Fed doesn't even talk about the money supply The Fed doesn't even publish money Excuse me a target the money supply and they changed how they publish Monetary aggregates during COVID so this is really the giant elephant in the room that the Austrian school has really been the only school of thought Talking about there have been some monetarists to their credit have been arguing that this large increase in the money spy would raise prices But their actual theoretical analysis is quite different from the Austrians and especially regarding their business cycle analysis Which I hope to get into a little bit later in my talk, but it's really that simple It's the Fed printed a tremendous amount of money and this was very different than during the financial crisis How the Federal Reserve printed this money how it was injected into the economy? There were many economists arguing in 2020 you print all this money you're gonna get inflation But no one is focused on that the Fed it was seen as having everything under control and When price rises started to occur we all started to hear that t-word. It was transitory. It was transitory It'll be gone by the end of the summer and boy have they been wrong at that, right? It's not transitory It's looking to be quite permanent, right? So This is this is part of the issue why the Fed has failed on its report card It it forgot how monetary policy works and either forgot or it lied You know, it's certainly both of those explanations Are you can explain the current environment we are in right? So as Austrians like to point out Something else that can happen when the money supply is increased and that's that interest rates fall So there's a huge drop in interest rates that we've seen over the past several years With this 40% increase in the money supply the federal funds rate is at 0% Dead the interest rate on corporate debt is at 2% It's the the lowest it's been over the past 60 years mortgage rates were at the 2% Huge drop. So as Austrians, we know that this increase in the money supply this new credit artificially lowers interest rates and this stimulates the Long-term investments. So it stimulates corporate borrowing corporate debt has surged Combination with the prior decade of already low interest rates corporate debt as a percentage of GDP has increased from 40% to 50% over the past 10 years tremendous amount of debt and These low interest rates have encouraged borrowing and long-term investments. So we all remember at the beginning of 2021 when there was a huge Speculation everyone's got their their their stimmies right their stimulus checks People were buying the meme stocks AMC The price of which skyrocketed 720% in 2021 massive increases Cryptocurrency experienced a similar boom bitcoins price went from about $10,000 and in the fall of 2020 to up to $60,000 a little bit over $60,000 in mid 2021 people were buying assets with You know with the value that what they were willing to pay was much greater than their their fundamental value according to actual Economic fundamentals to give another example Last year in St. Petersburg about 200 or so odd people bought copies of a history book on the special interest policy spending $20-$30 on it even though its underlying value is $0 This is clearly the the interest rates are starting to start starting to affect even even the Austrians But so we've seen huge speculation various Investments higher-order investments were embarked upon e-commerce artificial intelligence now undeniably Some of this was encouraged by COVID and the COVID lockdowns But a lot of this was driven by artificially low interest rates lower interest rates increase the present value of stock The NASDAQ in 2020 in 2021 was was on a Veritable tear increased by about 63% during this time period and all these wonderful investments people are saying It's giving me the new roaring 20s all of these Investments in relating to driverless vehicles artificial intelligence regarding e-commerce The you know phone apps etc all this boomed the fang stocks the big tech companies experienced huge increases and in production and in Market value during this time period and Then of course there's residential real estate home prices in 2021 increased by 17% Very large increase in 2021 1.6 million homes were constructed that was the most out of any year since 2006 right mortgage rates as I mentioned were very very low 2% or even lower a lot of people were We're buying homes again. You started to see another another housing bubble Form or at least that's what some of the more astute people realized other people said no this is this is normal This is interest rates aren't going to change. This is this isn't going to be a problem So only the Austrians really pointed this out Okay, that if you increase the money supply it will not only cause inflation But it will cause a distortion in the structure of production the economy will unsustainably lengthen You're gonna have a boom bust cycle All right, so the important thing is the Austrians point out is that these investments are are mal investments They are bad investments. They're not based off of underlying economic fundamentals Okay, a lot of people thought that well during the lockdowns people had saved the tremendous amount of money But you had to so the huge increase in savings and in reality that was just the nominal illusion Right people started to spend that money in the savings rate decline the savings rate fell During this time period 2019 to 2022 from 9% to 3% We are getting back to the levels right before the housing crisis And in fact we're now below that the people weren't saving right in fact this money that people spending this money Was not because prices were rising it was causing the rising prices, right? We know this This is again simple Austrian economics that the media the Federal Reserve and mainstream economists did not want to talk about So as the economy was adjusting as if people were saving more people were saving less This is this is a recipe for disaster and we started to see a so-called tug-of-war among the various stages of production between the short-term investments and the long-term investments as scarce factors the prices of which were bid up we saw labor shortages Shortages of other factors of production producer prices rose 35% during this time period so in comparison to the 15% rising consumer prices producer prices were rising Austrians would explain this is saying well, there's a there's a credit boom in the making Okay, factors of production are being bid up They're being bid up more than it was what expected and we're going to start to see prices rise So the fact that producer prices were rising more than consumer prices is certainly something that at least that this Magnitude should have caused people to to be to be worried about right so prices were going up Consumer prices were going up producer prices were going up people weren't saving as much. What's that going to lead to? Well, you're going to see more people borrowing businesses and consumers keep borrowing more in fact mid 2021 to mid 2022 bank loans increased by 13 percent We haven't seen those numbers since before the financial crisis. This is really a textbook case of Austrian bubble in the making right we flood the market with cheap credit businesses embark upon Projects as if there's more savings in the economy But there aren't more savings so producer prices rise Businesses have to keep borrowing more Consumers start to in debt themselves. They start to get into more and more debt So consumers are getting in more debt businesses are getting in more debt And of course we can't forget that uncle Sam has been getting in more debt I don't know if anyone saw the headline earlier this week. I think Jim Grant mentioned it 31 trillion dollars is our national debt. I mean, that's the national debt. We'll talk about it's actually much larger than that But you know, we'll just say okay. It's 31 trillion. Well, we'll go with that and 31 trillion dollars in interest rates are rising. That's that's not good. Okay It's also not good for people who have an adjustable rate mortgage or businesses who've been borrowing on the short term That's not good. Okay, so interest rates have been rising and this is in combination with the Federal Reserve Starting to raise interest rates 75 basis points over the past several months and federal funds rate went from zero percent to three percent So there's a huge pressure on interest rates right interest rates have been starting to go up and The funny thing is there's still a lot of room for interest rates to go up People are saying interest rates have already risen enough But when you adjust for inflation, they're still a little less negative. Okay So here's the bust. I don't mean to depress anyone But if I do that means I'm doing a good job. This is the S&P Adjusted for inflation. So everyone I'm sure has been watching their 401k's melt away over the past year I have news for you It's actually worse than what's been reported because you're not taking consideration that prices have also gone up by 8% during this time period So all the increase in prosperity. We thought that happened in 2020 and 2021 35% rise in the S&P During this time period quite quite large in 2021 Phenomenal year for the stock market has gone away. It's about 29% fall and this isn't taking consideration This is at least earlier in the week, right? So it's we're basically back to where we were in December 2019 Judging by the stock market, we've made no progress. There's been no accumulation of wealth, right? You haven't earned anything in your in your average investment account and real wages, of course, haven't gone up They've fallen by about 3% so this is This is certainly problematic and we're starting to see these problems appear from boom to gloom Tech recruiters struggle to find work, right? So the the once mighty tech industry which was benefiting from this huge credit induced bubble is now struggling We're starting to see concentrated layoffs in these higher order industries Home prices now posting biggest monthly drop since 2009. Oh, that's good news The the the home market which you've seen is impregnable is now suffering if you're a seller on the market Things are looking good. Even if you're a buyer the mortgage rates are approaching 7% We haven't seen interest rates that high for for a residential loan since the housing crisis This is a problem There's a there's a lot of problems starting to to debrew the the bust as the Austrians predict and the Federal Reserve did not predict Is is looking more and more like a reality that soft landing that we were promised the is is becoming It's not looking. It's not looking so good now. All right. It was basically all an illusion over the past couple years So let's look at where we can go from here, right? What's the path forward? What comes next? Scenario one is that the Federal Reserve tightens vigorously keeps raising the federal funds rate. They were already late to the game They should have been raising rates in the early 2021 at the at the very least especially by late 2021 not starting really in mid 2022 They should keep raising the federal funds rate The federal funds rate has to actually be positive which is adjusted for inflation is is certainly much higher than what it is now It over it's got to be at least you know round at least seven to eight percent at the very least This of course would cause the boom to end But we would take the pain now and inflation would go down Okay, this would be the path that we were to follow the the depression of 1919 to 1921 which I think is actually a fairly accurate description of what's going on now at least with the the boom So this is if the Federal Reserve does what it's supposed to do Highly doubt that will be the case The Fed has been pumping in tremendous amounts of money in 2021 and then really kind of been sluggish in 2022 because of the midterms And at least this is my my argument. I still think this holds true They've got one more meeting before the midterms There's a lot that could change new GDP data Whatever the Fed is posturing to be an inflation hawk, but will they I doubt it And even if they raised by another 75 basis points, I still don't really think that's enough for what they should have done before At least during during 2022 There's just too much government business and consumer debt borrowing costs are starting to go up And this is starting to impose incredible strains I don't know if anyone's looked at the stock market recently But it's very clear that Wall Street is Jones in for a rate cut They're kind of coming across is more of a heroin addict at the slightest news the Fed's gonna raise rates stocks go up We saw this earlier in the week. We everyone got happy with the Bank of Australia Raising rates less than expected and then reality comes back They're not gonna get their fix and then we see stocks fall and start Wall Street starting to realize that well in high interest rates They're gonna they're here to stay they're gonna keep staying They're gonna keep getting higher and they're gonna stay for longer than we expected So this this is certainly a problem and this is gonna pose a lot of pressure on businesses consumers and government That have been borrowing on the short term. This is this this is this this is an issue. Okay, so That's scenario one Scenario two is that the Fed tightens slowly or at pivots the so-called Fed pivot, right? Where it will stop raising interest rates as high as it's been raising and keep them at a level and then maybe cut Wall Street still overly optimistic that by the end of 2023 the Federal Reserve will cut rates and This is gonna give plenty of time for the excess money to be spent We still could see price rises increase because there's still a tremendous amount of excess cash balances and Consumers businesses and governments that have all this new money will then keep spending it out Prices will keep rising Inflation could keep rising the total rise in prices could go beyond 15 percent could go to 20 30 percent Etc. And this is even with the monetary indicators currently flat line. We there is money demand It's not just money supply and this would cause inflation to be to be entrenched Permanent decline in the stock market real wages We could see something like stagflation are these alternating periods of low growth So the periods of low growth high inflation High unemployment. We could say gradually rising unemployment Governments are going to be very very Concerned about raising interest rates too much because this is gonna put incredible pressure on the amount of indebted Businesses governments and consumers going on right now. I Unfortunately think that's the more likely scenario All right, I would like to be wrong, but I could see this problem lasting for a couple more years All right, we can either take the pain now or we could get rid of it Or excuse me, we take the pain now or we could just let slowly go away sort of grinding inflation All right, so the Fed caused the inflation and the Fed caused the inevitable recession this much we do know from Austrian economics and Past and present the Austrian school has exposed central banks We've really been the only school to really do this with with such vigor and to expose it in every which way Austrians aren't saying oh the Fed raised interest rates too much and that's what caused the recession the Austrian said no the Recession begins when the Fed starts lowering interest rates This is very important right and Austrians have to keep doing this because if not us Who else if there wasn't the Austrian school of economics the Fed wouldn't have been exposed over the past year or two so Austrians have to keep doing this and We have to keep doing this and we have to remember the motto that that means is said which is do not given to evil But proceed ever more boldly against it and that's what Austrian economists need to do when Criticizing the Federal Reserve and other central banks, so I think I will end there So thank you so much, and I look forward to the rest of the the event. So thank you