 Okay, good morning everyone. Today we have the exciting topic, a little broochy exciting topic of capital interest and the structure of production. Just a thing to wake everyone up. Let me start by noting that we've already mentioned that all production takes time. In fact, all action takes time. Time is what really differentiates human beings from beasts. Human beings use time as a means to improve their welfare, as we'll see because means, because time is essential to production. Beasts, on the other hand, experience time as duration. Humans do things, beasts endure things. So we use time as a tool. And we talked a little bit about the law of time preference. And let me just recap very quickly. According to the universal law of time preference of fact, individuals prefer to achieve their goal sooner rather than later. Okay, all other things equal. Their value scales, their future incomes, and so on. That's not to say, and we'll get to this a little bit later, that someone will not save for no return in the future. In fact, that will happen if someone believes, in fact, I had a little exchange with Brian Kaplan on the Mises list. If there's a human being on an island, isolated alone on an island, then he has a stock of durable goods. And let's say he's very, very long lived. That is that his span of his life is not a question here. The key point to be made is that, yes indeed, he will not consume all the durable good today or even this year. He will spread that consumption over time. But in fact, he will satisfy more of his wants today than he would, let's say, 50 years from now. In other words, he will allocate, because of time preference, units of the good maybe to his first 100 wants on his value scale. So that the 100th want today, assuming his wants don't change over time, will be more important to him than, let's say, the 10th want 50 years from now. So he might only save 10 units of goods for 50 years from now, consume 100 units today. And what will happen over time to these durable goods is that, eventually they'll run out. And he'll pass from the scene. That is, he will not continually postpone action so that those goods last for infinity. The wants today or the satisfaction of those wants today are more important to him, all other things equal then, than wants in the future. Another way of saying that, of course, is that people prefer their satisfaction today to the same satisfaction at some time in the remote future. Or they prefer a given sum of money today to the same sum of money in the future, all other things equal. And this really explains the loan market, okay? How interest rates and why interest rates exist on a market for loans. Let's do a perform a mental experiment. Let's say that, despite my lineage and the fact that I'm from New Jersey, you trust me implicitly. And that is to say, if you made a loan to me, you fully believe that I will pay that loan back one year from now. So let's say I solicit people to loan me $10,000. And I will pay you back one year from now $10,000. Would you make that loan? Okay? Assuming no default risk, you don't anticipate any default risk on my part or me just running off with the money and never returning. Okay? Of course you wouldn't. Okay? You would have to be bribed in some sense to overcome your time preference. The fact that during that year, you would have to abstain from consumption, from spending that $10,000 on consumption. There is an opportunity cost then to making that loan to me. And that opportunity cost is the disutility of waiting for consumption, for this money which you will then spend on consumption. So now, if I offer $11,000, that is to pay you back $10,000 in principal plus $1,000 in interest a year from now, then you may very well make me the loan. And I could continue to raise that interest premium to the point where almost everybody in this room would be willing to make me a loan. I could even the most high time preference person like Peter. Maybe if I promised him $20,000 for that $10,000 loan, he would make the loan. So in effect, what we have here is just simply a voluntary exchange. The method of separating a principal from the interest payment more or less be clouds the issue. Okay? Really what's being exchanged is a sum of future money, total sum of future money for total sum of present money. And because present dollars are worth more, as a result of time preference, than future dollars, I must promise or I must pay you, give you an IOU for more of those less valuable future dollars in order to get you to part with the more valuable present dollars. So in the case of a loan transaction, we have the borrower, we have the lender, and the borrower prefers the $10,000 in the present. I'll put P here, and that's to say today, to $11,000 in the future, meaning he is willing, fully willing to give up $11,000 in the future to obtain $10,000 today. Okay? He ranks the $10,000 present dollars above the $11,000 future dollars. Okay? The lender ranks them in opposite order. That is the lender, if he does make the loan, prefers the $11,000 IOU, or future dollars, in the form of an IOU, a promise to pay, to the $10,000 of present money. So each person benefits from the exchange. They both improve their welfare in the sense that they move from a lower-ranked good to a higher-ranked good. This is a very powerful analysis, because it allows us to shed light on a number of vexing issues, which I'll get to in a moment. But the key here is to recognize that the $10,000 today is worth more to the borrower than the $11,000 he's willing to pay for that at some point in the future. Okay? The interest is just a formality. That is, we call it the additional premium on the additional $1,000, which is the premium on present money. We call that the interest. Okay? And then we can do an arithmetical operation, and we say that the interest is a 10%. Okay? Because I'm paying you back $10,000, or $1,000, $1,000 more future dollars. Okay? And some people have denied that time preference exists. They've come up with, I suppose, encounter examples. Very early on, Bermavuak introduced this notion of time preference, the first economist to really make it an essential part of his system. He entertained objections such as, well, what about the case in which someone picks 20 pints of fresh blueberries and knows that he can't consume them all before they go rotten? Okay? They become overripe and not fit for consumption. Wouldn't he then be willing to trade, let's say, 10 of those 20 pints to someone for, let's say, 5 pints one month from now? Because those extra 10 pints would have gone become rotten? Well, again, the point is simply that what he's choosing between is the 5 fresh pints of blueberries one month from now and 10 rotten pints of blueberries one month from now. Okay? So by giving up those 10 pints of blueberries, they're not the same good. Okay? If he kept them in his possession, stored them, they'd be rotten one month from now. So he's really comparing rotten blueberries to fresh blueberries. And he prefers the 5 fresh, 5 pints of fresh blueberries to the 10 pints of rotten blueberries. Okay? And then there's the old example of ice in winter and ice in summer. If someone were given a choice, and let's say it's the middle of January, and this is before the era of refrigeration, and they were given a choice to get a delivery today of ice in the middle of January or to take delivery in July of the same quantity of ice, they would take it in July. Okay? So doesn't that, in a sense, counter time preference, that action, doesn't contradict the law, the universal law of time preference? Well, of course, again, they're different goods. Okay? Ice in the winter is much less desirable than ice in the summer. Okay? If you don't have a refrigerator. So almost all counter examples can be shown to confuse two different goods. Okay? Ice in winter, ice in summer, or rotten blueberries, and fresh blueberries. Okay? Now, time preference differs between different people and over time for the same person. Let me give you some example. Children have notoriously high time preferences. We say high time preference. What we're referring to is someone who puts a big premium on present satisfaction. Okay? Someone with low time preference is someone who is more willing, or relatively more willing to wait for their satisfactions. So what do children want? Children want things right away. Okay? When my son was three or four years old, we used to go to a local diner and in the entryway to the diner, there was a video game machine. And he'd want to play immediately. Of course, my wife and I would be starving. So we would want to go eat. And he would insist on playing the game. And so I would say, look, it was 25 cents back then. I said, look, if you wait until after we, just about an hour from that point, I'll give you, I'll let you play twice. I'll give you two quarters. Okay? So that's like 100% per hour interest rate, which is like millions per year. No, he wanted to play immediately. Okay? So at that point, I immediately departed from my commitment to voluntary exchange, overrode his time preference, drag him to the table, and only gave him one quarter when he came back when we were ready to play. So children tend to have high time preferences. But part of the maturation process for a human being is that their time preferences become lower. They take more thought for the future. They're more willing to save. Okay? And so their time preferences fall. They never fall to zero, obviously. People, because they act, are always pulling their goals closer to them. Anytime you embark on actions I mentioned, you pull your goals closer. Okay? You still want things sooner rather than later, just that you put a lower premium on having things sooner. Now, as people tend to age, okay, as they become older, we have a phenomenon sometimes called a second childhood, where all the people would begin going on cruises and spending money on sports cars that they never would have purchased and enjoying their lives. So, you know, people who are outside observers will say, oh, they're in second childhood. Okay? Well, no, the fact is as they get older and have fewer, less time left to enjoy goods and services, they're going to begin to have higher time preferences. So, over time, there's a sort of a cycle of time, normal cycle of time preferences. Also, outside events can affect people's time preferences. Let's say that we have that scenario from the movie Deep Impact, was it? I think it was called where there was a meteor that was going to smash into the earth and pretty effective, the earth would effectively or all human life on the earth would be effectively wiped out. Okay? And let's say that there was good scientific evidence that this would occur in a year. And let's say it was revealed in the paper, let's say tomorrow morning. What would happen the next morning? What would you see on the front page of the business section? Interest rates skyrocket. Okay? No one will make anything more than one year loan and even making very short term loans, people will demand high interest rates. Because they want to, they're moving all their satisfactions into the present. Okay? Because there is no future or there's not much of a future. Okay? And there is none after one year. And so time preferences will skyrocket, interest rates will skyrocket. As we'll see, there's a positive relationship between interest rates and time preference. Okay? Time preference being the causal factor. Interest rates being the result of changes in time preferences. Now on the other hand, let's say that there's an elixir that's discovered by medical researchers that will prolong the average human life, double it to 150 years. Okay? What will happen to interest rates? They'll drop. People will have more of a future to provide for. Okay? So what you will see is more saving lower interest rates. People have lower time preferences. Because there are more wants now in the future that they want to satisfy. Once again, it won't drop to zero. Now, time preferences are reflected in what we call the consumption saving ratio. The more of your, the higher that ratio is, that is the greater proportion of your income you devote to consumption versus saving, the higher your time preferences. So if there's a young couple, let's see, that gets married and their income is, let's say, combined income is $1,000 a week or something, or whatever, let's say $2,000 a week. Okay? So they may very well spend $1,800 on consumption, so it's a C, and put $200 aside per week. Okay? That's a nine to one ratio. Okay? Now the wife becomes pregnant, and their time preferences fall as they begin to think about the $400,000, $500,000 of college tuition they're going to have to pay in 18 years. And the other stream of expenditures they're going to have to make now for the child over time as the child grows. So this might may very well fall to, let's say, $1,500 to $500. So what's going to happen is saving is going to increase, consumption is going to decrease, and you're going to find that the ratio is going to decline. Okay? Less is going to be devoted to consumption, more is going to be devoted to saving as time preferences come down. Okay? So we're not saying that people are somehow prisoners of their time preference. Their time preferences are really embedded in their value scales. And those value scales can change from moment to moment. Okay? So not only do they rank different goods on their value scales, they rank goods at different periods of time on their value scale. There really is, at any given moment, when you're allocating resources, there's one value scale that includes all your present wants and all your known or anticipated future wants. And the way you allocate your income is going to determine what your consumption saving ratio is. So at the same time that you're determining your preferences for goods, you're also determining your preferences for goods now and goods later. Okay? I don't want to separate out time preferences and say it's not a part of your subjective evaluation process. That's somehow separate. It is not. Okay? That's important. Now, let me get to some issues before we get to production. And those issues have to do with first the attack on the payday lending industry. Okay? Is that what payday lending is? Okay, what payday lending is, generally, it occurs for people with low incomes. And what happens is that those people will go in and get an advance on their next paycheck. It's usually a two week advance. So, for example, if they want a $200 advance or loan, okay, it's typically, as I said, a two week loan, it could be a one week loan. What they'll do is they'll write out a post-dated check to the payday lender for a greater sum of future dollars. Okay? Two weeks from now. And so they'll write out a $250 check that will be cashed when they get their paycheck two weeks from now. It'll be dated two weeks from now and the lender will hold that check and give them $200 in return. Now, this tends to, the interest rates tend to be, by our standards, astronomical. Okay? It's usually $15 or $20 per $100 borrowed, but that's only a two week loan. And so, for example, they give a, in North Carolina, there was a study of the median payday loan fee in North Carolina is $36 and the median two week loan is $244. So, here's what happens. It's a loan like any other type of loan. So you have the borrower and then you have the payday lender. And what you get is the borrower getting $244 in the present. In exchange, they have to pay a $36 premium, so that's $280. They promise to pay $280 back and that promises the form of a post-dated check. Two weeks from now. The payday lender gives up the $244, the present money, and receives a $280 post-dated check. That's the IOU. And the exchange takes place. Both expect to benefit from this. Okay. Now, this is, I mentioned before that when we separate out the interest rate, which we do for purposes of analysis, okay, this is the essence of what happens. We separate out the interest rate and we figure out what it is, $36 on $244 for two weeks. Does anyone want to venture a guess on what it is per annum or per year? It's 419% per year. Okay. So people look at the interest rate. Activists look at the interest rate and they say, this is exploitative. They're exploiting this poor person's need. Okay. There's a number of, well, the first response to that is the person who takes the payday loan isn't stupid. He's going or she is going to find the lender that will lend to them at the lowest possible rate. So you're focusing on the wrong person when you blame this person for making the loan. Okay. And secondly, the borrower is benefiting. They prefer the $244 today to the $280 two weeks from now. It's simply a voluntary exchange. But when you restate it as it's a 419% interest rate, that's usury. That's, you know, exploitation. That's gouge, price gouging, interest gouging. Okay. Secondly, the second critique, criticism, is that this is also, it's called predatory lending, by the way. This is predatory lending because if the customer can't pay, he doesn't have sufficient funds to pay, they allow him to roll that loan over. Okay. To write another check post-date another two weeks for another 419%. Okay. And so somehow then this is increasing, intensifying the exploitation. But of course, do we have to pay off our credit cards that have relatively high interest rates? No, we don't. This argument could be used against credit card lending. It's predatory because you're allowed to roll it over. Okay. You don't have to pay it off every month. Okay. So there's a little touch of sort of a condescension on the part of the people that are making this critique. Middle class people and upper class people who go into debt on their credit card in many cases in a way that, you know, they regret later on. They're not asking government to regulate their credit cards. They're asking them to regulate the loan market for the poor. Okay. So the poor are poor. They're not stupid. That's the key point. They will shop around for the lowest cost loan. Now, let me get to the another criticism. What you must keep in mind is that it's been a study that's shown that payday borrowers are more likely to have poor credit histories to have worked with credit counselors in the past and are more likely to have one or more bounce checks in the previous five years. So they are high credit risks. So that's not a pure interest rate. Part of that is a risk premium. But secondly, there's a very high overhead cost, okay, for making loans. If it's $100,000 loan, it's relatively small. But if it's a very small loan, those high overhead costs don't, they don't change much. Okay. So part of it is not even an interest rate, part of that extra $36. Part of it is the cost of administering that small loan. And part of it, of course, is a risk premium for default, for the inevitable defaults that occur. Bottom line is, those who criticize this lending are making a judgment on people's time preferences. They're saying they don't believe that that that people, it's immoral or it's wrong for the borrower to have these high time preferences, okay, to be willing to pay such a high premium for having present goods. Another point to be made is that, or another critique, is that, well, the payday lender does not, well, by the fact that it exists, it turns people into habitual borrowers. But once again, that can be expanded to saying, well, the fact that we can get credit cards that we've had credit cards offered after, you know, after World War II, they became so widespread that that made turn to middle class or, you know, upper income people into habitual borrowers. No, what it does is to give people a choice, okay, to either pay today, okay, to pay or to only purchase within the income that you're earning today, or to borrow and be able to purchase things and enjoy them now and not have to wait for them in the future. I mean, that's exactly what a mortgage loan is, okay. There weren't any mortgage loans before the 1930s in the United States. People saved up and they paid for their house. They saved up 10, 20 years and they finally got a house, you know, 20 years later. Now, the mortgage market allows us to anticipate our future income and to get that house now and to enjoy it for 20 years, okay. But for that enjoyment, we are paying an interest rate. Same thing is true with poor people, okay. Finally, one point we made here, all of the payday lending industry has been totally created by government regulations, okay. Most states have regulatory laws, okay. That is that they cap interest rates at certain levels. And I saw a, see the figure, I don't know, it could be as low as 20% or as high as 300% in some states, but there are caps. This is the way of getting around that, okay. These in Walter Block's terms, these are, are heroes, okay. Because they are getting around that loophole because they don't state it as an interest rate. They simply state it as a payday loan and you just write a check to them and so there's no formal interest rates stated, right. More, more reputable and lower cost lenders would be able to lend, maybe a bank would lend in a state where it's, you know, 100% is the cap. They might lend this guy 120% instead of 419% because their costs will be lower and they can spread the risks more, okay. Because they'd have a bigger clientele, but they're not permitted to. So these people, the payday lenders are those who stand between a poor person and an illegal loan shark, okay. They're the last resort before illegal loans, okay. So now am I saying payday lending is good or bad? No, I'm not saying that. I'm saying from the point of view of poor people, given the situation, given government regulations, they are benefiting. Just as much as the payday, not in a measurable sense, but just like the payday lender is benefiting, okay. And I think, you know, it's a, payday lending is a great innovation of the market. Let me get to one other issue in the loan market. And that is so-called toxic mortgages, okay. And there's a center for responsible lending that should be the center for, and there are centers for irresponsible language. Toxic mortgages, okay. You immediately, it's a pejorative term, obviously. You immediately load the dice against people that make subprime loans, institutions that make subprime loans, okay. Subprime mortgage loans to, again, people with low incomes or people with bad credit records. But now they're complaining that they're making these loans, okay. If you recall about, I think in the late 1980s, there was, and even before that in the 70s, there was a phenomenon called red lining in the United States. Red lining meant that banks, I don't have a red pen here, I guess I do, that some, that what banks would do in the mortgage market in a city, okay. Let's say you have a, you have a city here, let's say it's Philadelphia. North Philadelphia is notorious for the crime and the arson and murders and so on. What they would do is say, you know what, we don't trust the people in this area, okay. It's a mainly black area. We don't trust the people in this area to pay back, okay. Now they're making a legitimate business decision, they're not doing business, they're just saying that, you know, we're grouping these people all together. It's very difficult for us to tell the difference between them as far as their credit histories and so on. So we're going to draw a red line and we're going to say no one gets mortgage loans in that area, okay. So there was a big outcry. There's criticism of banks for doing this. The Federal Reserve changed regulations, or regulated lending to the extent that they forced lending into these areas, okay. Now the exact opposite is happening. Now they're complaining that they're making too many loans or loans that are toxic, that these poor people are victimized by. And we'll get to why these loans are occurring. Again, it's a problem with part of it is due to the government inspired or stimulated boom, housing boom that we've had. But let me just say a few words about the toxic, so-called toxic mortgages. There's a number of different types. There's a simple adjustable rate mortgage which has low teaser rates. Sometimes they're called 222 slash 28s, which means first two years you pay very, very low rates. And then the last 28 years, your subject to having those rates adjusted as interest rates change, okay. There's also 100% financing where people don't have to put down any down payment. There's also interest only loans where people almost never pay off their equity. That is, the minimum payment is the amount of the interest. So it's called a no equity loan, okay. So if someone sells their house, they don't have any equity in that house. And if housing prices go down, they can't pay back the equity. The most toxic one is the negative equity loan where the minimum payment is actually less than the interest rate. So if you buy a $180,000 house and you're only making the minimum payment, that the amount you owe is increasing, okay, every year. It's actually going up. You're building up negative equity. That's called an option adjustable rate mortgage, okay. So it provides you with options of either paying at least the interest or even more than that, or paying actually less, but at least the minimum payment, which is lower than the interest rate. Okay, so in fact, I just heard today on NPR coming here that the Fed is meeting today to make decisions about regulating the subprime loan market, okay. And the Center for Responsible Lending, they had a speaker on there talking about all the negatives of the subprime lending. But of course, now what they're not telling you is that many young couples, many poor people, are simply not going to get houses. They're not going to be able to afford homes. They're going to have to live in apartments and so on. Once again, it's a question of people's time preference, okay. They're willing to go into the step because maybe they believe that their income is going to go up over time sufficiently to meet the higher interest payments or sufficiently to make more than the minimum payments. And they make mistakes, okay. They're not saying that everyone in the subprime market is defaulting on their loans, but the defaults have increased the last year to as interest rates have climbed. The key of course though is that Americans since 1995 have believed that housing prices are going to continue to increase, okay. So that if that happened then you can sell your house if you can't make the payments and you will have enough to pay off the mortgage, right. So once again they're closing off choice by people with higher time preferences to exercise those high time preferences, to pay the higher interest rates, okay. And you can go on, it's very interesting to go on to the website which I just looked at briefly this morning of the Center for Responsible Lending and look at you know they have seven points which make up the the characteristics of what they call then use the word toxic but I think it's actually it's also an example I call predatory lending, an example of a predatory loan, okay. Okay, all right now that's what we've done is we dealt with the consumer market, okay, or the market for loans, right. Now actually the most important part of the or the most important determinant of the interest rate in the capitalist economy is what we call the production structure, okay. As I said before production takes time and it proceeds in stages. So let me just give you a visual example of that, for example the production of shoes and I will use the button to zoom in, okay. If you wanted to produce shoes from scratch it would take you a substantial amount of time, you'd have to actually have the cattle and then if the cattle were slaughtered then you would go into the next stage which we call the higher stage or the higher order as Peter talked about yesterday and that so hides a higher order good that is the animal skins and then you would have to tan them and so on and go through a process of turning them into leather in the next stage and that would take a certain amount of time and then you would then you could assemble the shoes from that and from other materials in each stage you would of course need land and labor as well as these capital goods so the hides a leather and so on or intermediate or capital goods that are being created in this production process and then they return into shoes and then there you have to combine the shoes with various distribution services, transportation so on to get them to the retailers and then they would be sold to consumers at the end of the process or if this is a Robinson Crusoe making his own shoes he would then employ the shoes himself for his own consumption, okay. Now in a capitalist economy all goods are produced under the division of labor and specialization in an extremely time-consuming fashion in which there are many stages of production. Now what is the, let me step back for a moment, the criticism of the capitalists which began with Marx actually before Marx was this, the capitalist is someone who simply invests money in a firm, we're not talking about a manager, let's assume a capitalist simply invests money in a firm and then at the end of the year somehow, so he's invested a hundred thousand dollars, the product is sold for hundred and twenty thousand dollars, he receives the extra twenty thousand dollars and he's seemingly done nothing, okay. Why do we need a capitalist? Okay, what is the function of the capitalist? Marx said it was not, there wasn't any, that he was just extracting surplus from the workers, he was paying them enough to reproduce themselves in some sense, to reproduce their labor but and seizing the surplus. Well in fact let's think of trying to produce an automobile from scratch, okay. You would need mining tools, okay, so there's a group of people, they have the knowledge, they have the technology, you have engineers and so on and they're going to produce let's say through a cooperative effort, let's say a producer's cooperative, so what they'll do then is somehow they're going to have to save up in advance enough food and enough clothing and so on to see them through the production process, let's say it's going to take seven years from the beginning and they have the mine, so they own the mine and so on, so what they do then is they combine the original labor with the mine, they have to make some tools and then they mine the iron ore, then they have to, from the iron ore, they have to transform that into steel, so they have to produce again themselves, you know, the steel plant, steel machinery and then process the iron ore, turn into steel and then an auto assembly plant and machinery, assemble the automobile and then seven years later they sell the stock of automobiles for let's say one million dollars and they split it amongst themselves, the key is they had to wait for their income for seven years, okay, in order to do that without starving in the process they had to save in advance, they had to postpone consumption, okay, to save up the goods necessary to get them through to maintain them during the lengthy production process, well this is what the capitalist does, this is the capitalist function, okay, the capitalist is the one who abstains from present consumption, pays the workers every two weeks even though the product is not going to emerge onto the market for another three months a year or five years, whatever the production process is and then at the end reaps a premium, okay, now let's assume a perfect certainty, we're assuming that there's he's not bearing any burden of loss, okay, all he's doing is postponing consumption to the future, he perfectly knows, everyone knows what the price will be for automobiles in the future, now because of the returns to excuse me, specialization and the division of labor, the greater efficiency of specialization, you don't even have one set of capitalists which we call a firm, producing any good in today's world from beginning to end, okay, what they do rather is produce one stage, okay, or even a part of a stage, okay, the firms will produce maybe you have mining firms, then you have steel plants and steel firms and you have auto assembly plants, GM and Ford, so they're separate, each set of capitalists then wait for their income during the period in which production is taking place, they pay the workers either in advance or every two weeks, the workers get paid, okay, at the end of the process the workers in exchange for getting paid every two weeks before the product comes onto the market, the workers give up the ownership of the capital good, okay, and let me put another example up here, they put up, they give up the ownership of let's say the wheat, in this case we're talking about bread, and the flour, okay, it exchange for present money, so that's the exchange that takes place, it's very very similar to the exchange that takes place on the loan market, so what you have is the following, you have the laborers and you have the capitalists, okay, and the laborers, let's say in total give up say the control of or the ownership of let's say the wheat, in return they get a certain sum of money, they get wages, okay, that's present money, the capitalist gives up the present money, in exchange the capitalist gets the wheat, wheat goes to the capitalist, present money, so present money here, which we call wages when it's paid to labor, goes to the laborers, okay, they both are better off, now why would the the capitalist can't eat all that wheat, why would the capitalist want the wheat? Right, the capitalist doesn't want the wheat for his own consumption, okay, or he wants maybe only a very small part of it, what he wants it for is to sell it on the market in exchange for money, so what he sees in the wheat is not the wheat itself, it's the expectation of future income, that's what he gets from ownership of the capital goods, so each day as as we progress towards being finished and ready for sale in the market, he has an expectation of of future money, okay, well, so it's no different than an exchange on on the loan market, okay, it's present money basically for future money, wages for the capital good, okay, now to produce any good you must have a structure of production, right, now so let's just sum up the capitalist function, the capitalist function is to assume the burden of waiting for income from factors, okay, the interest is the difference between the sum of the factor payments, let's just talk about labor, the sum of the wages that he pays for the laborers, okay, and excuse me, the total revenue that he gets from the sale of the automobile, so let me show you how how this might work in a multi-stage production process, we just make this a little bit smaller, if the time being that's, this is our sort of, this is the production of a particular good but it also can be expanded to the entire economy, we can call it the structure of the whole economy, but for the moment let's just look at it for one good, let's say that in the in the highest stage, so we call it the fourth stage, okay, what happens, the capitalist if you let me let me direct your attention to, capitalist pays ten ten dollars, you can think of ten million dollars, ten thousand dollars, whatever it is, the capitalist pays ten dollars in the fourth stage, it's not working, okay, so the capitalist pays ten dollars to the laborers, okay, the laborers then work for the capitalist in that fourth stage in producing some capital good, at the end of that stage the capitalist then is able to sell the capital good for eleven dollars, okay, now he gets a premium of one dollar which is about ten percent, so in the left column here is his interest, he earns one dollar in the production process, laborers earn ten dollars, okay, why did he earn that one dollar, he didn't do anything, let's assume he hired the managers and they they oversaw the assembly line workers and the managers got paid and so on, all he did was pay wages in advance, well that's what he did, he paid wages in advance, he overcame his own time preference, he abstained from consumption, renounced consumption for a full year, in exchange he gave ten dollars up and got eleven dollars a year later, okay, similarly in the second stage, what happens in the second stage is now the capital good is then sold to rather the third stage, to the third stage capitalist or firm, okay, it's sold for eleven dollars, but they need workers to work on that capital good to turn it into a lower order capital good, a capital good that's closer to the consumers, so what happens is that they pay eleven dollars in wages, they pay nine dollars, I'm sorry nine dollars in wages, eleven dollars for the capital good, they lay out twenty dollars, at the end of that stage they sell the capital good for twenty two dollars and receive an interest return of two dollars, which again is about ten percent, as we'll see there's a tendency in the market economy for the interest rate, the pure interest rate to be equalized in every process of production and over all stages of production, if it wasn't there'll be a shift of factors, okay, to where the returns were the highest, now once the capital good is sold for twenty two dollars to the second stage capitalists they then lay out the twenty two dollars in advance but they also have to hire workers, they spend twenty eight dollars on wages, in total they've spent fifty dollars in investment, they've invested fifty dollars for let's say each one's a year for one year and workers work on the capital good and then they, capitalists own it at the end and they sell for fifty five dollars, the capitalist then gets five dollars in interest, which again is ten percent, fifty dollars when part of, part of, fifty dollars was invested, part of which went to the workers, the other part went to the third stage capitalists, okay, there's a few things I want to point out here, now finally obviously in the first stage or the consumption, consumer good stage, the capital good is sold for fifty five dollars, let's say this is the automobile industry, okay, so the steel and so on is sold for fifty five dollars in all the parts and the last stage is the assembly of the automobile and workers are hired in the assembly place for forty five dollars that are invested in wages, so for a hundred dollars then of investment, the capitalists at the end when they sell the final good to consumers a year later they sell for a hundred and ten dollars and they get a ten dollar interest payment or return, they get the difference then, so the interest rate in the structure of production is the price spreads, the rate of price spreads, okay, the rate, the ratio of what you, you receive over and above what you've paid out, okay, divided by the amount that you've invested, the total amount that you've invested, once again we can sort of sum this up here, if this is the economy as a whole what has happened is that consumption was a hundred and ten dollars, saving an investment if you look at the investment in every stage, the amount that capitalist laid out in every stage from the first to the fourth, okay, that comes to a hundred and eighty dollars, the total spending then in the economy was the consumption plus the investment so a hundred and ten dollars spent by consumers, a hundred and eighty by capitalists to give us two hundred and ninety dollars, okay, and we can see what the ratio was, the consumption saving ratio was C slash S, okay, that is a hundred and eighty dollars was saved in the economy, a hundred and ten was consumed. What's interesting is that if you want to keep your structure of production permanent and I'll talk a little bit about Rob's and Crusoe to make this little bit more concrete for you, what you have to do is you have to abstain from spending, the capitalist cannot spend any of that hundred and eighty dollars for their own consumption, they can only spend it on capital goods, otherwise what will happen is that the structural production will become shorter and the economy will become less productive. So what happens is the workers spend all ninety two dollars on goods, okay, the goods that are produced in the economy and the capitalists can only spend eighteen dollars on goods, only the interest return, okay, the other money that they receive in production has to be what? Reinvested if the economy is to reproduce the same goods in the next period, okay, let me just say a few other things here, these are the rents that Peter talked about, the capital goods in the second or fourth stage, okay, fifty five dollars was paid for the capital, capital good in the first stage, twenty two dollars in the second stage and in third stage eleven dollars was paid for capital goods, okay, and that gave us eighty eight dollars, okay, we see some consumer goods a hundred and ten, okay, I want to go into too much more detail here, but you see the point, what if in the next stage, when those capitalists, or in the next period, when the capitalists received let's say the fifty five dollars in that second stage, when he sold the good for fifty five dollars, what if he spent the whole amount on consumption and didn't reinvest in buying the capital good from the second stage and didn't pay the laborers, what would happen to the amount of goods in the economy eventually, they would go down, okay, what if every capitalist stopped investing and everybody spent their money on consumer goods, well what would happen exactly, in a very short time the amount of consumer goods would dry up and people would be eating hand to mouth and many of them would starve, okay, now that's all very abstract and it's again it's just a diagrammatic representation of what happens in the economy, there's a lot of complexity here, as Peter pointed out, you would use some, you would use trucks in the fourth stage, let's say to haul the iron ore, but you also trucks would be used as a consumer good, so different goods of the same physical quality, I mean similar goods that are exactly the same physically would be different stage goods depending on how they were used, okay, this all as I said is all very abstract, let me for a moment throw you back to the Crusoe economy and let you see, and I want you to just neglect that last column, we don't need that, actually we don't need, we only need the first three, okay, and let me show you how capital accumulation, the building of capital, and also what we would call saving, okay, occur, okay, Robin the Crusoe is on an island, he has only his own energy, okay, there's nothing there, it's just the natural resources on the island, he has no capital goods and his own energy, let's look at what his inputs and outputs are, okay, in the first period, and we call it T sub zero here, what happens, Crusoe spends 12 hours, and I sort of use that similar example, fishing, okay, and can catch four fish with his hands, very low productivity, has to stand in the stream and literally grab the, grab at the fish, so he catches one every, every three hours, leisure is also a consumer good, it's a directly produced consumer good, it's one of my favorites actually, you know, just laying around watching television, watching my high-definition television that Peter helped me set up, anyway, alright, so you have, so he's got a very low standard of living, just keeping himself alive, alright, now he's, he knows that if he produces a net, he can increase his output, alright, so what he does then is, he cannot just produce the net and have the same standard of living, he has to reduce his leisure and or his output of, of, of consumer goods like fish, in order to have time or to save hours to invest in the net, and notice what he does, so now he doesn't just have consumer goods industries, you see eleven hours for leisure, nine hours for fish, his standard of living falls for a while, and it takes him five hundred hours, four hundred hours a day, four hours a day, he spends on building the net, and after five hundred hours, okay, over time, that net is built, okay, so now he has a capital good, now there's a capital structure in the economy, he uses the net then to increase his productivity, okay, with the net he can catch one fish per hour, his productivity in fishing has tripled, so if you look under T2, he has to, what he does is he increases his leisure and he increases consumption of fish, consumption of fish more than doubles, his leisure increases by two hours, he has to spend one hour replacing the net, repairing it every day, cleaning it and so on, otherwise it'll fall apart, okay, if he did stop doing that and, and use that, that other hour to work and catch another fish or for leisure, that net would wear out and he would be thrown back to a very low standard of living, okay, so what we're trying to say here is that people have to overcome their time preference for present good, that is he has to reduce his amount of leisure and fish for a period of time in order to accumulate capital, to sacrifice to accumulate capital, that's what the capitalist does, okay, now does he want to grow more, because this is really economic growth, does he want to grow more, well let's assume he does, but again it's going to take another sacrifice, now knows what happens, it's easier though because he has some capital and the standard of living has risen, but there's still a sacrifice involved, if you look at T3 now, you'll see that he now has to cut back, okay, he wants to build a ladder, okay, because he builds a ladder, it's going to be easier for him or he can go up the ladder and get coconuts, so he can increase the variety of goods that he consumes on this island, so what he does is he cuts back in leisure from 14 to 13 hours, cuts back in fish from from nine to seven and he saves three hours a day, okay, so what happens to standard of living? It goes down again from what it was, still higher than before he built the net, so he spends three hours a day in 200 days because it's 600 hours total investment in building the ladder, he builds a ladder and then what happens? We see that the fruits of that sacrifice come only in the future, okay, now under T4 he has 13 hours of leisure, no less than he had before or one less than he had before, but he has eight fish, okay, instead of seven and he has six coconuts, okay, and he has to spend a half hour fixing the ladder every day and repairing it, keeping a good repair in one hour, replacing the net, but now he has a greater variety of goods as standard of living has risen, so we'll just take it one more step, you might want to build a house and there to build a house, he's going to have to cut back on the amount of fish, the amount of coconuts and he'll spend an hour and a half a day building the house and eventually the house will come into existence, now this is how the United States, just to take an example, grew economically, okay, think about, you know, the first pilgrims that landed and how to carve a living pretty much with their hands, you know, out of the forest and so on, and build some rough sort of shelter to find wild game and so on, but they built up a capital structure, they made axes, okay, they built buildings, they built wagons and carts and so on, they domesticated horses, okay, or horses were brought with them, but, you know, they bred the horses, so they would have more horses and so on, okay, and very slowly America, the U.S. became, developed a mighty capital structure so that by World War I, we had the greatest industrial power in the world, now my question to you is what if everybody had suddenly had a high time preference during the 19th century, okay, let's say people suddenly said, you know what, I want to, or even today, it doesn't matter, let's say all of us stopped saving today, okay, we all went out and splurged and bought luxury cars, ate out every night, everyone sold their stocks and bonds, emptied their bank accounts, okay, what would happen to the mighty capital structure built up over hundreds of years in the United States, the fact, the fact we wouldn't be, for a while we would get a lot of consumer goods, in fact we'd get more consumer goods for a while, because there's a lot coming down through the pipeline, but payments could not be made to workers in the mining industry and so on, so eventually the mines were closed, no one would be working the oil wells, we wouldn't be getting any natural resources to turn into raw materials, okay, the factories would then over time begin falling apart and we would be thrust back to the 1600s, okay, and probably most of the population would die, the key thing is it is, capital does not reproduce itself automatically, it takes sacrifice on the part of capitalists, now capitalists are not a separate class, it's another point we have to make, all of us are capitalists to the extent that we save and invest, okay, even putting money in a mutual fund, I mean you don't have to directly invest in a company through a stock or a bond, you put money in a mutual fund in a bank, in an insurance, in your pension, all of that money is invested throughout the structure of production that we talked about before, okay, put it back up again, actually I'll put up a new diagram that shows it being increased, before the structure of production had four stages now it has six stages in this example, the reason being that I assumed that people now change their saving, consumption saving ratio, okay, because remember before consumers were spending a hundred and ten dollars, consumers now cut down spending only ninety dollars and saving an extra twenty dollars, if you want to save the extra twenty dollars, you have to add extra stages, okay, and the extra stages means that we have more and more capital goods being built, okay, so now the value of the capital goods is much higher than it was before, okay, it's twenty dollars higher than it was before, we don't have to go into much detail here, but now instead of spending a hundred and ten dollars on the consumption, on consumption, that was before, and only a hundred and eighty on capital goods, we're now spending only ninety on consumption, but two hundred on capital goods, key point here though, we have less spending on consumption, why would capitalist invest if they expect fewer dollars at the end of the process, this is what Keynes called the paradox of thrift, before Keynes wrote in 1936 however, Hayek had already solved the problem, in 1929 he wrote a paper called the paradox of saving, in which he showed exactly why it happened, now what happens is this, as laborers are shifted up to the higher stages, and more capital goods are produced, it lowers costs, each labor becomes more productive, so labor costs are lowered, overall costs are lowered, and as a result, as the goods come out on the market, and think about now the high tech industry, okay, as we got more and more PCs, as it was more saving and investment in that industry, what happens to the prices of PCs? They tumble, okay, so you can get a PC for, you get a computer for three million dollars in 1978, okay, and it would take out up a whole room in your house, and it wouldn't even have the computing power and the speed that, you know, just a normal run of the mill PC would have today, okay, prices have come down to you know two thousand dollars and fifteen hundred, and you know, for desktop of five hundred dollars now, okay, but yet the computer industry didn't shrink, the first year the PCs were shipped, there was something like five hundred thousand shipped, by two thousand there was something like ten million shipped, okay, but prices were falling, why would these capitalists continue to invest and expand the computer industry? Because their costs were falling by more, which is exactly what happens here, now if the Fed didn't inflate, we would actually see prices falling, because now there's 90 dollars, consumers spending 90 dollars on more goods, so there are more goods being sold, all supplies are shifting out, and less money being spent, so all prices would fall, now that's how the increase in your standard of living will be reflected, that's how it used to be reflected in the 19th century, every year, except for wars like the civil war and the, in Britain the war against the Poland, every year there would be a fall in prices, as a capital structure increased, increased labor productivity caused more goods to come onto the market, and with a given amount of gold, or a very slowly increasing amount of gold, because we were on the gold standard then, prices would fall, right, so that's the paradox of saving, and it was solved eight years before Keynes came up with his brilliant idea of the paradox of ship, the thrift, that is that if we all try to save more, well then we'll be spending less on consumption goods, and capitalists will want to produce less, and it will plunge the economy into a depression, but this shows a complete lack of understanding of the capital structure, and how the capital structure is developed, and that is what capitalists are interested in, isn't the final payment, it's the difference between the amount they invest, and the amount they receive, and you can see even with more stages, they're investing less than they're receiving, it's the rate of price spreads that determines capital investment, now so you have two parts of the loan, two parts of what we call the time market, or the inter-temporal market where people are trading present goods or future goods, you have the loan market, the biggest part of which is actually loaning money to to producers, but also consumer loan market, on the one hand, and then you have the structure of production, everybody who who invests, or either lends or invests money is a capitalist, so we actually perform as individuals more than one role, we're capitalists, but we also may be workers, most of us are also workers, we're laborers, and if we own land or rent out land and so on, then we're also landowners, notice one thing here that, and I'll get back to it, the rate of return when we had less saving was 10% before, remember, I mentioned that to you, now in each stage the rate of return is about, I have it somewhere, interest, it's about that's wrong, the rate of interest, well it's basically, the final stage, see we have 60, gets whatever 4 over $60 is, okay, I thought I had the interest rate here, let's see, oh natural rate of interest, it's about 7%, okay, so the interest rate will fall as is more saving, as the interest rate falls what happens is that that's an incentive to capitalists to borrow more money and to begin to invest more in new stages and to develop a greater capital structure, so keeping in mind that there's two parts of this inter-temporal market, I can show you then the simple supply and demand diagram in the what we call inter-temporal or time market, let me just go a little bit better on it, okay, the interest rate is determined by the supply of savings which is the supply of present goods and the demand for future goods, that is it's determined both by those who are lending money to borrowers as well as those capitalists who are investing in a structural production, okay, those are the people who supply present goods or savings, okay, those people who demand savings are the consumers that are borrowing, okay, as well as wage earners that are getting wages, the intersection will give you the interest rate, okay, now as people's time preferences fall the supply of savings shifts out, so the interest rate will drop, in this case it drops from let's say we have an interest rate initially of 10% at the top here and suddenly people want to save more, their time preferences begin to fall, okay, as we said there could be a variety of reasons for time preferences falling, for people reevaluating future versus present goods, one of the most important reasons is as we get richer as the capital structure evolves, okay, and makes all workers more productive, given a higher income you will tend to save a higher proportion of that income, so it's self-reinforcing, not automatically self-reinforcing, but when we, the more money we have now, the more we begin to allocate money to the future, okay, so if you think of a very very poor person that really has just enough income to keep alive, they say very very little, but as your income increases you begin to take more thought for the future, now you can't compare between people, there might still be the, we know they're rich playboy, Mike Tyson for example earned four hundred million dollars in his boxing career, and he's bankrupt, it's all gone, okay, we call that super high time preference, okay, okay, rest other other stars have, you know, other sports stars have gone on and been very frugal with their money and you know, have started companies afterwards and so on, okay, so again it's a question of your values, but anyway so suddenly you have more savings than, than, than will, that then can be absorbed at ten percent and so the interest rate has to fall, as the interest rate falls, okay, and let's assume that there are financial intermediaries like mutual funds and banks and so on, capitalists will borrow more and invest those in, in, into the structure of production, okay, one other point I want to make, consumption loans, okay, if consumption loans increase, the demand for consumption loans increased, and you didn't have any increase in, in, in, in investment structure of production, you could reduce your structure of production, right, because consumption loans are dissaving, okay, there, there, people who have high time preferences are getting those loans and they're using them to spend on consumer goods, okay, so another point I want to make is the supply of savings isn't just what you put into a bank, okay, there's a wide variety of financial instruments that you purchase that will funnel your savings into the production structure, okay, so we're including money, not just put in banks in that supply of savings, but money spent on new or old stocks, bonds, mutual funds, put in pensions, okay, many many different ways of saving, okay, I just want to say a few more words about, well something that that Peter touched on, but I want to just go over real quickly, actually before I do that, let me just give you a little series of symbols here, you know, that really are the, represents a refutation of Keynes's paradox of thrift, we're down here, see we're most macroeconomists, just look on the economy as producing one lump that they call GDP, the the the Austrians, Hayek and Mises, tend to divide the economy up into two different kinds of sets of industries, actually more than two, but for simplicity I'm only using two, on the top you have all these C's as subscripts and what they do represent is the consumption goods industry, on the bottom you have K's, that represents capital goods industries, okay, as we know actually we have a whole structure of capital goods, let's say people's time preferences fall, suddenly they want to, they begin spending less on consumption and saving more, okay, let's say as a baby boomer generation, ages and they're worried about paying for their college, well that's all gone now, we're already paying for, already spend hundreds of thousands on our kids' college education, they're now putting money aside for for retirement and so on, okay, so there's a big change in social time preferences, so this ratio goes down meaning the numerator falls consumption spending and saving increases, okay, well here's what Keynes looked at, he looked at the top line here, obviously if consumption goods, if consumption spending falls, the demand for consumer goods goes down, that's why I have the downward arrow, the price of consumer goods then falls and so does profits, pi represents profits and the amount of labor and wages fall in consumer goods industries and therefore labor decreases, they leave, okay, they shift to higher paying as we'll see in a moment capital goods industries and there and finally the amount of consumption itself or the amount of consumers goods it decreases, okay, so Keynes said if all that happens that's going to cause unemployment, firms are going to cut back on the amount of consumer goods which they produce, which is all true, well Keynes missed of course either out of ignorance or deliberately because he was writing a tract for the times, that is he wanted to write a tract justifying government deficit spending and increases in the money supply because he believed this would get us out of the, get Great Britain out of the Depression, whatever the reason he didn't take into account the fact that when the denominator increases you have a full on interest rates okay and once you have a full on interest rates there's an increase in the demand for capital on the part of the capitalists and they will then demand more capital goods which means that the price of capital goods will go up and therefore profits the capital goods industry will go up which will stimulate them to expand and so therefore they'll try to get more workers, they'll raise wages for workers okay and they'll get more workers so the workers that are being set free in the consumer goods industry being laid off will find their way into the capital goods industry or in fact will be drawn into the capital goods industry by the higher wages eventually we'll have more capital goods produced and then finally in the future you'll get more consumer goods so I have CF there the point is when people reduce the spending on consumer goods now does it mean that they want less consumer goods for all time of course not they don't want to sacrifice consumer goods for no reason they do that because they believe they can have more consumer goods in the future now if you could think back to the Robinson Crusoe example I gave you when Robinson Crusoe consumed less fish when he was building the net does that mean he wanted less fish for all time did he say to himself oh you know what my economy is in depression now you know I'm only working for three fish I have to go home for the last four hours no he used the four hours to do what to build the net so laying off workers in the consumers goods industry is a a scene in non qua a sequel known a scene a quote known the French word without which not okay it's a prerequisite of of increasing capital goods okay and that's what the Austrians understood and that's what Keynes ignored okay let me just say two more words or two more make two more points one point is that as Peter pointed out far right okay got it okay thank you well once you have an change in the interest rate okay or rather well once we introduce the interest rate if you have the demand for labor okay as as as being determined by the marginal revenue product of labor as Peter talked about you have to take into account that that labor is being paid in advance paid for in advance by capitalists so to refute marks the labor's are getting less than their full marginal revenue product less than they're adding to production but that's because the product is not coming forth onto the market until some future period of time okay so the demand for labor shifts down to the dmrp okay so at each point laborers get paid less than the full marginal revenue product why because the discount is what goes to the capitalist that amount of money the discount on the marginal revenue product is what the capitalist earns for time preference last but not least something else that I believe Peter went over the interest rate is necessary to to determine the capital value of durable factors of production capital goods and land and so on okay so if you have a machine with a life of three years and you expect that machine to add one thousand dollars to the revenue of your firm each year and the interest rate is 10 percent there's a very simple present value formula that you use to find out what the total capital value of the machine is you can either rent it for a thousand dollars a year each year or you can purchase it in advance okay for an amount of two thousand four hundred and eighty seven dollars okay now if you purchase it in advance okay then the return on the machine is basically 10 percent per year okay that's that's that's what the interest rate would be okay last but not least the basic land okay which we know is permanent we're not talking about agricultural land but basically basically standing room okay land where you have to stand to work on okay or you put buildings on or farms on okay the basic ground land if that is going to yield you five fifty thousand dollars per year in terms of the addition to the total revenue of of the firm or of the production process then what's going to happen is that you're going to get the factor price is going to be equal to the marginal revenue product divided by the interest rate so if land is assumed to give fifty thousand dollars a year in additional revenue then you would divide that by the ten percent point one oh and so that land would be worth five hundred thousand dollars if you had no time preference an interest rate was zero then the land would have what kind of a value an infinite value because you wouldn't discount that fifty thousand dollars a year at all so it would be an infinite price so that's another another argument that or illustration rather that time preference exists and must be positive the fact that land has a finite price I will stop here and entertain any questions you may have yes very good question and in fact there was a hysteria set off back in that I think it was two thousand and two when Alan Greenspan made some very convoluted statement about prices becoming uncomfortable or the rate of inflation becoming becoming uncomfortably close to zero percent I forget the exact words tomorrow when I go through my electoral money and banking I'll bring them in the point is that there is deflation phobia I call it deflation phobia that has arisen as a result of the experience with the great depression not the experience itself but the misinterpretation of what caused the great depression and much of this misinterpretation has to be laid on the shoulders of Milton Friedman and his very influential interpretation of the great depression actually himself and his co-author Anna Schwartz their point was that the Fed caused the great depression or they caused a garden variety recession to turn into a great depression because they allowed the money supply to shrink now first of all that's deflation in a different sense in just falling prices number one but secondly yes the money supply did shrink and it shrunk substantially by about one third I believe from 1930 to 1933 but it shrunk in an economic environment in which prices were not allowed to fall in which Hoover brought in at the beginning of the depression the big business men in the U.S. and exhorted them not to lower wages because if they lowered wages that means that workers would have less to spend on consumer goods and we'd have more more unemployment because fewer consumer goods would be produced and it would be a downward spiral and then later on when Roosevelt came in we had the National Recovery Act which basically cartilized different industries and made prices rigid if prices were permitted to fall as the money supply fell things would have been much different we wouldn't have had that the problem of falling prices or really a rising purchasing power of money confronting fixed rigid wages also one thing which was interesting I believe it was Joseph Stiglitz or yeah I think it was I think it was Stiglitz I don't think it was it may have been Krugman they wrote an article this past year in which they pointed out oh yeah it was on it was a memorial to Milton Friedman but in the article they pointed out some of the mistakes he made and what they said was that in fact they were saying from a Keynesian point of view in fact it was not the case that the Fed caused the money supply to contract the Fed did everything it could after 1930 to inflate the money supply by issuing new money but it was Krugman who said that okay Paul Krugman said that by issuing new money it's one of the few true and important things Krugman has ever said issuing issuing more bank reserves but the banks were fearful of lending these out so that you know they had they were holding excess reserves and so and also people were taking money out of the banks reducing their reserves at the same time so the Fed really didn't the Fed had no experience with this before I mean so the Fed was trying to the best of its ability and knowledge to increase the money supply for a number of years but society was massively moving away from the banking system it was really the chickens of the 1920 monetary inflation coming home to roost the banks had overextended themselves and in a market economy there's nothing wrong with even financial institutions failing if they've made mistakes in the past and that was what was happening it was a liquidation process of past errors yes what do you think of the current savings rate in this country is it in fact low and if so how would you explain it the personal saving rate is low meaning that's what they always cite but the national saving rate which includes retained earnings and corporate saving I haven't looked at those figures lately it's not as low as obviously the personal saving rate which was what one or two percent well there's a couple of things here one is the fact that people have saved less because of the housing boom they say they see the equity in their houses going up and they feel that well you know what that's fungible with the money in the bank so I'll take some money out of my bank or I'll even take cash into my equity and I'll consume more so they are saving that is they're saving them in that the value is locked up in their house yeah yeah I mean that's people point yes that's true but it's really if it's a bubble it's a false value it's a value that's going to be reversed as we see now with the housing bubble collapsing well also I think the saving rate 401k contributions are not counted as savings I wasn't aware of that if that's true that that's seriously undercounting and the money coming out okay I didn't realize that yes Pablo okay anyone else any other questions okay thank you