 This weekend I joined my good friend Jay Taylor, who hosts his own radio show, Taylor's Hard Money Advisor. We discussed the role of Austrian economics in understanding the market crash of 2008 and how some institutional investors became very rich using Austrian theory to short that crash. As Herbert Stein was famous for saying, if something cannot go on forever, it will end. So if you're interested in markets, business cycle theory, and what Austrian economists have to say about the even bigger bubble created by the Fed since 2008, stay tuned. It's really great to have Jeff with me again. Thanks for joining me, Jeff. Hi, Jay. Thanks so much. Really good to have you with me. I understand. Before we went on the air, you were talking to somebody about, was it social security or Medicare or something like that? Oh, no. I was talking to a little old lady, literally, about Medicare and she had been frightened by a Medicare counselor. There are apparently a lot of scam operations out there that prey on people who are unaware of what they need to do. Medicare is the law of the land, and they go out, and they're concerned about the penalties, et cetera. So one of these counselors had sort of prayed on her, and it turned out that she had nothing to worry about. But it just goes to show you that none of us really knows how to comply with all the laws they've crafted for us. Yeah, it really is a problem. In terms of just figuring out social security and all the different angles to it, and what it covers and what it doesn't cover, and then the alternatives to quasi-private sector alternative insurance companies that you can latch on to that are in bed with the government and they work with the government and provide, it is incredibly complicated. I know from firsthand experience, I'm thankful that I have a wife who looks after that stuff for me and I didn't have to worry too much about it. Jeff, I'd like to talk to you a little bit today about the whole idea of applying Austrian economics to making money, believe it or not. We'd like to do that. And I can remember David Tice, my good friend David Tice used to be on CNBC back in the days of the late 90s even already, and then in the 2000s, long before, well, after the dot-com bubble burst, and then David was there year after year talking about how we were building up another bubble in the housing sector in other areas as well. And of course, they just laughed at him. David is very much an Austrian school thinker, and there were a lot of others too. And of course, finally, they were right. Finally, the Austrians are right, and the housing bubble burst, and we had one of the worst financial calamities since the Great Depression. And many people think it hasn't really gone away much at all yet that we're still in a contraction phase. The economy isn't doing probably as well as what the mainstream says it's doing. But Mark Thornton, you had an interview with Mark Thornton, one of the economists that's associated with the Mises Institution, the end of bubble blowing. Can you explain maybe, again for our listeners, a little sense of the Austrian business cycle and how if you watch it and sort of sense where we're at in that cycle, you can sort of see what's coming. Well, Jay, in essence, Austrian business cycle theory is based on monetary policy and it posits that monetary expansions when they are created by governments or central banks unnaturally and hence cause an unnatural increase in the supply or monetary base. And when they cause an unnatural lowering of interest rates inevitably lead to malinvestment and a resulting bust. Now, what Austrian business cycle theory does not explain per se is how to time or make money off the resulting bust. But it does teach that the bust comes. And we shouldn't think of this as some sort of abstract. I mean, there are many, many instances in recent history where people got quite rich off of shorting busts. Mark Spitznagel, author of The Dow of Capital, is of course only one example, someone who became a billionaire as a result of the 2008 crash. And then there are perhaps more suspicious examples of people becoming quite rich by shorting something like our friend George Soros went with some of his currency trades. So this isn't anything new. I think that the Austrian school deserves credit for identifying it for explaining it. But, you know, cycles have existed throughout history because monetary expansion has existed throughout history, even prior to central banks. What are your thoughts? What are your thoughts and the thoughts of Mark Thornton and other economists about what we're seeing now? Because, you know, we've had this incredible collapse of the equity markets. Prices fell for a short period of time across the board, pretty much. Not only stock prices, but commodities and all kinds of things. We have, you know, huge amounts of unemployment. The malinvestment came back to roost. Of course, we saw we saw that cleansing process, but then incept the Federal Reserve and seems to be doing the same thing that that caused the problem, at least that's my sense of it. So what are what are people saying within the Mises Institute now about what's going on at this moment in time? Well, there's no question that the Fed has managed to reinflight the bubble at least in equity markets in certain asset classes and has reinflated it in bigger and worse ways than 2008. So if you read David Stockman's contra corner every day, which I do, you will probably be very alarmed about the fact that the bubble has grown, that derivatives have continued to pace, that overall worldwide debt levels are actually higher than they were in 2008 and that both businesses and individuals, personal debt and business debt have started to creep back up to levels at or above 2008. So there's nothing happy about the debt that is washing over over the world. But when you mentioned asset classes going down in the last crash, it's interesting that that about the only thing they didn't go down was gold, which which tends to teach us that gold, although it certainly is a commodity, is a different type of commodity and that while diversification can turn out to be bunk, in other words, your real estate, your stocks, your bonds, you know, other other, you know, your commodity investments can all go down simultaneously during a crash, which we saw in 2008. Gold as a store of value and as a safe kind of money tends to be a place where people go during times of uncertainty. So I would say that, you know, while there are definite anecdotal symptoms of another horrific crash, whether you want to consider the skyscraper index, as Mark Thornton talks about in the building boom, whether you want to talk about, you know, what's happening in places like the Hamptons, if you want to talk about people still spending three hundred thousand dollars on expensive dinners in Las Vegas. These are all anecdotal examples that we haven't learned anything in that we're right back where we were in 2008, if not in a worse spot. So clearly a crash, if you want to call it that, or a correction is coming. And clearly there are going to, there are people who are going to make money and become rich off the next one, just as they were the last one. Well, we had, we were talking to your friend and mine, Michael Oliver. A little while ago, Michael is definitely a believer in Austrian economics, but he uses his technical tools to try to help him time the market. And I think he's had some success in the past. Certainly I've been following him and what he's been doing. So I guess in a way you could join the party if you knew when to leave before you were too intoxicated, right? And you might profit from it. Well, absolutely. There are people who sold their houses in the mid-2000s because they thought that the housing market was just overheated for their particular region. And they looked at things on paper and they realized there was no organic growth happening and that housing prices were crazy. Now, houses continued to go up for another couple of years. So they didn't necessarily hit the absolute peak, but prices crashed to at least 2000 and oftentimes pre-2000 levels. So certainly some people were able to buy back their houses or simply bank a lot of capital gain as a result of that. So, you know, certainly there are probably lots of people smarter than me right now, shorting the Dow because I think the Dow is at unsustainable levels. And I think most of the companies are obscenely priced when you consider their actual earnings. But you have to have some wealth to do that. And you also have to have some nerve to do that. Because shorting is not for the faint of heart. No, it's not. It's a very dangerous game. In fact, of course, there are some ETFs that allow you to do some of that perhaps without so much risk as going out and actually shorting the instruments themselves. But, you know, you do an interview, Jeff, and I would like to just let our listeners know. I believe you do a weekend interview, don't you, every weekend? Right. Mises weekends. Mises weekends and some great stuff there. One, I think you did recently, well, maybe going back late last year with Bob Murphy, the Fed's stock market casino. And this is really the way it seems to be to me to be. I mean, I look at some of these ETFs and especially some of these triple, double and triple ETFs. They move extremely fast. You can either make money or lose money extremely fast. And there clearly are people in their institutions, the Goldman Sachs of this world that have, you know, have logarithms, computer models that are that are getting buying and selling stocks, you know, in and out so fast that you can't even see them move. And so is this what's going on? It seems to me more than anything else. But what seems to bother the Fed and what's the Fed is most concerned about is keeping the stock market rising and keeping this casino game going. Why do you think that is? Do you think you have some experience in Washington? A lot of these lawmakers, are they in this gambling casino in the stock market? Well, a lot of them certainly are. I would say the Fed has managed to keep the stock market going in nominal terms, in real terms. I'm not sure that the market is higher than it's ever been. But it is an interesting conundrum that the political class that talks endlessly about voters and about egalitarianism and about wealth inequality is the class that is so terrified to confront the Fed or central bankers to say, well, that's independent and we can't really understand monetary policy. And, you know, the Fed is ought to be left alone. It's really complete nonsense. Anyone with a few hours' time can learn what the Fed means. Anyone with a few hours' time can demystify this stuff. And as you mentioned, it really is sad the way markets work today. I think the average little guy has very little chance against computer algorithms and against instantaneous trading. And I also think that it's perverse and sad that we've forgotten what markets are supposed to be. Markets are supposed to be clearinghouses. They're supposed to be places where people put investment capital at risk so that it can go to its best and highest uses, so that it can clear out bad debt, so it can clear out bad companies, so it can replace bad management and also provide capital and money for startups, for ventures that show promise. And at some point in a true clearinghouse, you know, good decisions are rewarded, bad decisions are punished. So markets in their abstract sense are noble. They perform a noble purpose. But what we have today in America is so rigged and so crony that it really causes despair, I think, for the average investor. No question about it. You know, I think David Stockman makes a very good point when he's when he's talking about this endless quantitative easing that is essentially destroying. But it's really obscuring the price, price discovery. It's not allowing price discovery to take place. If you don't allow capital to be priced properly, then you're destroying capitalism, I would think. And so instead of the noble function that you mentioned, capitalism really serves a very valuable purpose in terms of generating growth in the economy instead of instead of really picking the pockets of average people redistributing. Well, you know, I like to think of it, Jeff, a little bit like I'm familiar with these little penny stocks in Canada, as you know. And one of the biggest risks that we have as investors in those stocks is dilution. Well, that's these little companies go out, they don't have any money, so they go out and issue another 10 million shares and all of a sudden are 50 million. And all of a sudden your piece of the pie is 50% of what it was before. Well, when I think back to quantitative easing and the trillions of dollars that Mr. Bernanke created during that timeframe, that in essence, we as dollar holders have all been diluted by a huge amount because all of a sudden huge amounts of money have been created out of nothing and given given to the bankers, essentially to the privilege of the ruling elite. So do you think that's a fair analogy? Well, there's no question. The monetary base has quadrupled four times over since the 2008 crash. Now, the reason most of us do not see and feel that as directly as we might in consumer prices is because much, not all, but much of that monetary base is still sitting on the balance sheets of Fed member banks. In other words, they have not deployed that capital into the general economy via lending, but rather they've just pumped up their reserves there above and beyond bank reserve requirements. And that makes sense because in times of economic uncertainty, banks like anybody else like to hold on to their capital and stay fairly liquid. So you can pump quantitative easing under the bank's balance sheets till the cows come home. What you cannot do is make banks loan money at greater risk than the small amount of interest they can simply get from the Fed if they're not so inclined to do so. So that's what's happening. But this money has either remained on bank balance sheets or found its way into the equity markets. It is starting slowly, but surely defined as way into consumer prices. But it's something where every action has an opposite reaction and quadrupling the monetary base of Fed balance sheets in just in less than 10 years is going to have a terrible, terrible impact on all of us. Yeah, the less than 10 years probably, you know, but a lot of things can go on. The party can go on and the process can continue a while longer. You had another discussion, I think, with Patrick Barron, an interview with him talking about essentially about the dollar's hegemony and how much longer it can go on. You know, Nixon caused us a default on the on our obligation to exchange gold for paper in 1971. Then Henry Kissinger set up what has become the petrodollar system and what seems like that is enforced by US military power around the world. And, you know, make a case that really what the US has to do is be able to control the pricing of petroleum. At least that's part of the theory anyway. And that's what seems to have happened post 1971. And when Kissinger and the Nixon administration set up the what became known as a petrodollar system, did I think you had a discussion maybe along those lines with Patrick Barron? What could cause the end of the dollar imperium? Well, Patrick's a very interesting guy. And as he points out, the dollar has become what the euro was from the beginning, which is essentially a political project. It is a political project that is propped up by nothing more than the full faith and credit of the US government. And of course, it's military might. And the fact that we have an unholy arrangement with OPEC, whereby OPEC sells fuel in dollars rather than euro or reninbi or whatever. But at some point, people are not going to simply hold on to dollars that are rapidly devaluing the political project on like a commodity backed dollar is just that. It's something that can rise and fall with the political fortunes of the US. So for the moment, with all the unrest in Europe, with the problems in Russia and with the slow in growth in China, the US dollar is still perhaps other than the Swiss Frank. The least ugly baby in the nursery. But at some point, the rest of the world is going to say no moss. They're already a wash in dollars. And they're going to realize that we're never going to clean up our fiscal house. And that as a result, we've essentially exported our inflation to them. Well, it's it's a nasty project. It seems to me that our militarism overseas. This is a topic perhaps for another day. We talked to Daniel McAdams about what the US is doing with its military and the propaganda that comes into us and the stories that we're being told are nothing short of just straight out lies. But in any event, you know, we talk a lot of gloom and doom. My engineers telling me we only have a minute left. You also on your radio program talked about some reasons for optimism, maybe 30 seconds. Give me a reason why I shouldn't be so grumpy. Well, a case for optimism is simple. As Herbstine told us, what can't go on forever won't go on forever. So we know that the intelligence system is not going to work forever. And it's up to us to replace it with something better. Well, that's that's a nice, quick, short answer. I want to thank you, Jeff, for being with us again. Tell our listeners where they can go to to feed on all of the great radio podcasts, the podcast that you have and other lots of information that the Mises is at Mises.org. It's Mises.org. And we encourage you to come and and learn everything you'd care to learn about Austrian economics for free. Yeah, please do. And also, you know, there you guys have some great events coming up. And one I'm looking forward to going to in Connecticut in the near future. So I hope to talk to you again sometime soon, Jeff. Thank you very much for being with us today. Thank you, Jeff.