 This weekend, we welcome Bob Murphy, economist, consultant, and longtime friend and scholar of the Mises Institute to address the vital topic of Fed interference in financial markets. Is the global equity and bond market charade, mostly engineered by Fiat monetary expansion, about to collapse like a house of cards? Is the investing game basically rigged? How can Janet Yellen and financial elites keep markets from crashing without endless new rounds of quantitative easing? Why is knowledge of Austrian economics necessary but not sufficient for individual investors? And would stock markets play a social function in a truly free society? Anyone interested in investing, personal finance, Austrian economics, and the wit and wisdom of Bob Murphy will enjoy this weekend's show. Stay tuned. Ladies and gentlemen, welcome back once again to Mises Weekends. I'm your host, Jeff Deist. And as promised, we are joined this weekend by our friend and longtime Mises Institute scholar, Bob Murphy. Bob, how are you today? I'm doing great. Thanks for having me. Always fun to work with the Mises Institute. Well, I love this topic, the topic of Fed interference in the financial markets. Just about a week ago, Alan Greenspan was speaking before the Council of Foreign Relations, one of our favorite organizations. And he basically said, I'm paraphrasing, that quantitative easing, i.e., bond buying by the Fed, didn't do much for the economy in general, so so much for demand side Keynesian monetary policy, so to speak. But he did mention that QE has done a tremendous job in boosting asset prices. So I was wondering if you could comment on this apparent dichotomy between Wall Street and Main Street. Well, sure. And also, there's a dichotomy as I tweeted out when I saw that story. I said, Alan Greenspan, once he leaves office, goes back to being a good economist. Because of course, as I'm sure most of your listeners know, that he was, when he was a fan of Ayn Rand Greenspan wrote a very famous essay, Touting the Virtues of Gold as Money. And but then of course, as Federal Reserve Chairman, that doesn't seem to be what was on his agenda. So I think he's exactly right now that, again, that he can perhaps speak a little bit more freely about what he thinks is going on. There's no denying that with the various rounds of QE in the United States that asset prices have skyrocketed. But the question is, you know, is that really good for the economy? And I just don't see how anybody with a straight face can say that the creation of trillions of dollars of new money that gets injected into the banking sector is conducive to real economic growth will actually allow the US to use its natural resources, labor power and capital goods in order to raise the standard of living of people. I don't see why you would need constant injections of money to do that. In fact, I think we're in the midst of a bubble and that as the central banks, if they do just turn off the faucet, you're going to see the system come down. Well, also about a week ago, Janet Yellenfett announced the end of QE3, at least for now. Now, quantitative easing in the sense that the central bank buys vast sums of bonds from banks and credits those banks with new reserves. So by definition, this increases the monetary base. How does Janet Yellen keep the whole thing going without quantitative easing, which has been described as sort of life support for a dying patient? Well, sure. That's a great question. Just to solidify that point, it's not just that we're deferring to Eileen Greenspan's opinion. I mean, there's several examples in the last few years of when the stock market was either sliding or just was lackluster and Federal Reserve officials explicitly said because of that and other considerations, we're going to continue our expansion. The most recent one is in mid-October, October 15th, as of that point, the S&P was down about 7% just over the last month. And then the next day, that Thursday, James Bullard comes forward and says, you know, maybe we should think about pausing the taper and all of a sudden the markets start railing, they're up 1% the next day. So you can really see that. And now you're right, Jeff, with the Fed sort of sticking to its guns and saying, we're winding this thing down, QE3, we're not going to buy any net assets. But then the very next day, the Bank of Japan comes out and says, you know, with a surprise to markets that they're going to ramp up their stimulus program. So to me, I think they were, they're trying to have it both ways. They know they got to eventually stop inflating at some point, but yet they're trying to get the timing right. When do they want this just to come down the asset markets? I would suggest if you go back and look at the turnover of the Fed chairmanship the last three times, within a relatively short period, when Volcker came into power, there was the awful early 80s recessions fairly soon. When Greenspan himself came in, that was in August of 87. And then just two months later, you had October 19th 1987, the biggest one day drop in the Dow, in percentage terms. So you can see, and then of course, when Bernanke came in in February of 06, it wasn't soon after that that we had what we now call the great recession. So I think the pattern here using Austrian business cycle theory is that a Fed chair comes into power, inherits a big bubble that the previous guy blew up, it crashes early on in his term, and then he blows up his own bubble and then hands it off to the next guy or Gail now as the case may be with Janet Yellen. So my guess is that she's going to have to let asset markets correct pretty hard fairly early in her time in office. Bob, right now the Dow is at about 17,000 or roughly triple. It's low of 6,500 back in March 2009. But in the same time period, the monetary base has also roughly tripled. So are nominal Dow numbers important or should investors care about the monetary base as well? Well, the way I would look at it, I think I'm agreeing with you, but the angle I take with it is I've just gone to the St. Louis Fed's website, you know, the Fed database that allows you to chart stuff pretty easily, and I just put total Federal Reserve assets as one of the variables and the other one is the S&P 500 index. And you can see that prior to the financial crisis, there really wasn't much of a correlation between the two. The monetary base or the Fed assets was just kind of gently rising upward and the S&P was bouncing all over the place depending on what was driving the markets those days. But then since QE1 really kicked in in early 2009, it is really astonishing to see just the overlay and how the S&P 500 moves in lockstep with the Fed's balance sheet. And again, it's not just a mere coincidence that we know in real time from various Fed officials that why the Fed would start signaling one thing or the other with its policy was often because they were monitoring the markets as a sort of barometer of how good is the economy doing. So I think it's, I mean, it's undeniable even proponents of QE say the stock market rose because of the various rounds and that when the Fed officials come out and are more willing or more dovish, let's say, the accurate they use, that you see asset markets respond. So their only explanation is to say because investors realize the economy is going to be better because of more monetary stimulus and therefore they bid up stock prices rationally. Of course, I would argue that, well, no, it's the other way around that it's the monetary stimulus is blowing up asset bubbles because it doesn't reflect the underlying fundamentals. You don't make the economy grow more in the long run in real terms just by printing up more money or electronically creating more money. So that's, I definitely agree with you that the recent highs in the stock market are not a sign of optimism and this isn't the permanent prosperity is here now. Bob, why does the Fed's monetary expansion not flow uniformly through asset classes? Why has the Dow risen faster than, for example, consumer prices? Okay, now this is an area, again, I just want to acknowledge humility here. I am surprised by how slow it has been to show up in the standard CPI. Now, having said that, I mean, I go to the grocery store and the little packets of meat that I used to buy now, I swear they have half as much meat in them as they used to and the price is the same. All right, so there's, you can see even like the cereal boxes, the cardboard that they use is much thinner now than it used to be. All right, so the little things like that are the toilet paper you buy is not as high quality as it used to be several years ago. So what's happening is clearly the production costs are going up and retailers know that people are still petty pinching and aren't able to raise retail prices and so they're cutting costs other ways. Or just look at, again, I love the grocery store example. Now when I go there, I'm lucky if I can find an employee, right? I even bag my own stuff and check myself out, right? So there's various things that retail outlets have done so that they don't have to pass along large explicit price hikes. So there's that element as well. But more generally, I think what it is, and this is something that Austrians have known about, Mises and Hayek talked about it in the 1920s is the fact that just because consumer prices are relatively tame, you should not therefore think that the central bank is engaging in a neutral monetary policy. Prices are different. Mises and his work stress the fact that don't think of it as a price level because that's a misleading metaphor that prices are individual things and there's differences. So I guess from a 30,000 foot view, Jeff, the way I picture it is, look at the various rounds of QE. It wasn't like the Fed was literally going around with a helicopter and depositing cash into the pockets of regular Americans, letting them go to the mall and spend it because that would have raised consumer prices if they had done it that way. Instead, they were buying treasuries and mortgage-backed securities and doing other things behind the scenes to make loans to large investment banks. And so if those are the people that were receiving that money, what are they going to do with it? They're going to go invest it. They're not going to run out and buy a bunch of baloney at the grocery store. And they're going to go and put it into assets and commodities. And those are the things that you saw rise in response to the various rounds of QE. So I guess ex post, you can certainly realize why things happened in the pattern they did. But I do admit I am surprised by how tame the official CPI hikes have been. Well, when you talk about prices, David Stockman made a comment recently to the effect that there's no honest pricing anywhere in the world because of the distorting effects of central banks. So how enormous is this problem? I mean, it goes into every input of production, like you mentioned, the cardboard box of your serial comes in. Do we really understand how big this distortion is? I don't think so. I mean, just because, again, you see those figures. Here's what I think happened is the average person, because I was doing this in 2009. I was going around giving talks to the general public. People who are not ideological, that they were just regular working people, taking their kids to soccer practice and whatever, but they knew something was really screwed up. And when I walked through my PowerPoints and then show them that graph of the monetary base and how it was rising, and then all of a sudden it just had that vertical strip there at the end that started in late 2008. And people, I mean, their jaws would drop. They couldn't believe it. They thought it was a misprint or something. And so that got people's attention because they knew that that was crazy. The fact that Bernanke in a short period of time had basically inflated more than all previous Fed shares combined. And then as you mentioned, Jeff, he's done more since then. And Janet Yellen was continuing the trend. But then several years have passed now. That was back in 2009 when I was first showing people that. And so I think they get lulled into complacency and say, well, maybe that isn't such a big deal. I mean, people like Krugman are telling us not to worry and they keep making fun of all the chicken littles who are warning about currency debasement. So I guess pumping in that much money doesn't make a big difference. So I think, Jeff, part of it is this literally has never been tried on such a magnitude with so many banks around the world, central banks around the world, coordinating their efforts. And so in that respect, it's uncharted waters. But let me, my main point is there's no way they can get out of this and go back to a period of normal central bank balance sheets without major pain. And so I have been surprised by how long they've been able to keep us sort of in this sluggish, calm period or equilibrium where they just keep limping along with a bloated balance sheet. But the idea that they're just going to gently grow out of that and just let all their assets unwind gradually I think is pretty far-fetched. But it seems like this time around, there are some dissenting voices, right? I mean, there are famous people in the financial world, people like Peter Schiff, Jimmy Rogers, Mark Spitznagel are examples of well-known financial figures who openly profess or discuss Austrian economics at least to some degree. Do you think that there's a place for Austrian economics or a movement surrounding Austrian economics in the financial world? Oh, definitely. And that's where I've been focusing a lot of my work. I'm a consultant and so a lot of my clients come from the financial sector because yes, they definitely, especially people who work in the markets or they are advisors and talk to regular people about their money, they need to have a general idea of what's going on and what's coming, what's in store. And so those people are very receptive to Austrian economics, much more so in my experience than academia, at least the higher levels because there's a sort of snootiness and a folkens sophistication where it's no, yeah, you peons, you see the Fed's monetary base tripling and you freak out, but I'm sophisticated enough to know in the right hands, we can handle this problem. We can definitely maneuver and do just the right amount of stimulus and then unwind it what we need to and thread that needle, whereas more practical people realize that that's a very dangerous thing to be doing. So I think you're right that people in the financial sector definitely respond when you explain Austrian business cycle theory. When I get up in front of a regular crowd of people, many of whom are from the financial sector and I just explain the Austrian view on why, in a depression, the last thing you want is the government to run huge deficits that you wanna return savings to the private sector and boost private investment. I mean, they get that, they understand that, they understand that if the reason we're in this mess is because there was a leveraged housing boom with people taking on too much debt and interest rates being pushed artificially low, well, then they get, okay, the solution to that cannot be the government running huge, unprecedented deficits and the central bank pushing interest rates to unprecedented low levels, right, they get that, that makes no sense. So I think there is that sort of hope that people in the financial markets do understand the wisdom of Austrian economics. Bob, I'm sure you've heard the old adage, never invest according to your ideology and I'd like to get your thoughts on whether Austro-libertarian investors fall prey to this. In other words, it's almost akin to emotionally betting on your favorite sports team we're so invested in Austrian economics that maybe it clouds or impairs at least our short-term investment decisions. Well, yeah, that's probably a good advice always for people to watch out for. And certainly, I know a lot of people in the Austro-libertarian community are very big fans of gold and I certainly think people should have a stockpile of that several months worth of their basic expenses at least in terms of having that much physical gold but does that mean I'm sure gold is a great investment and that it's gonna go up in the next three months? No, I don't know that. So there is a distinction between academic economists doing their thing and charting courses for the macro economy and giving big picture trends about, hey, if the Federal Reserve does this, this is gonna happen. We can't really get the timing right because we don't know when they're gonna pull the trigger on something. So there's certainly a division of labor there and certain financial investment advisors but they should know Austro-economics. So let me put it to you this way. Mises apparently said one time that he studies money in financial markets but he was never gonna be rich off of it and so I think knowledge of Austrian economics is necessary but not sufficient to be a successful investor. Well, do you think the stock market, the equities markets are essentially rigged against the little guy, the individual investor? Well, I certainly think that the decisions that are being made by top Federal Reserve officials and other powerful people are not done with the interest of the little guy or Main Street in mind, I certainly agree with that. I think there are some trends though. I mean, the market still is working where the little guy can get access to equity markets more so than 30 years ago. However, I don't know that that's necessarily a good thing because this is sort of perverse idea that's come up in America. I was certainly raised with this to think you are saving for your retirement by plunking away money in a well-diversified mutual fund where well-diversified means, oh, it's like the whole S&P 500, it's not just a few tech stocks, right? And that's a different mentality from what it was a century ago, let's say. I mean, you can read in human action where Mies has just matter of factly talks about people buying bonds and having savings accounts and buying permanent life insurance policies and that was the way the average household saved whereas now people think about saving as getting access to a bunch of stocks and I think that that's a perversion that partly explains why the households right now are so vulnerable and why if the market does crash it's such a social calamity because so many people have their, quote, retirement locked up in equity markets. Bob, it's almost time to wrap this discussion up but I wanted to ask you one final question. If we could do away with the Fed and regulatory capture by so many businesses and industries, how would stock markets operate in an Austrian universe? In other words, would they be noble but imperfect clearinghouses that allocate capital to its best and highest use as opposed to sort of the cronious casino they are today? Yeah, I think the difficulty with this stuff is I actually, I've written stuff for Mies's.org in the past, if people wanna look up it's the social function of the stock market and the social function of futures contracts I think those are the titles where things like the equity markets, capital markets in general and even derivatives markets in a free society where there was no government backstop to those things and no special privileges, I think they would allow people to channel risk around the people who were risk loving would be able to take that on and people who really wanted to have relative safety would be able to hedge that away. So there is a definite social function there and yes, I think the stock price does convey meaningful information, right? So that's, I mean, part of the whole Austrian message is that prices convey real information about the economy to everybody so that they can coordinate their plans and the same is true for stock prices that let me just to give you a silly example, if the stock price were far too low then that allows somebody to come in and buy up a controlling interest in the company who probably shouldn't have that ability, right? You want the stock price to be high to signal the relative importance of that company and the value of its assets to make sure only really qualified people are able to make executive decisions about how that company uses its assets. Just like Mises says, you know, the high price on a natural resource is a signal to other entrepreneurs, use this with care, right? The consumers really like how this is being channeled into a few operations right now and so that's what the social function of having high resource prices is. So I think it's the same thing with the stock market. Yes, there would still be mass psychology and there would be following a crowd and I'm sure there would be bubbles but they would be much tamer because you wouldn't have this huge central bank apparatus fueling them and you wouldn't have people believing in such things as like the green span put where they thought, wow, we can go ahead and party while times are good and not worry about if we're taking on excessive risk because if the whole system did start crashing surely the authorities would step in and prop it up. So you wouldn't have that backstop. So I think people would be much more cautious during the upswing. Cautious indeed. Dr. Robert Murphy, thank you so much for a fascinating interview. Bob blogs at consultingbyrpm.com that's consultingbyrpm.com. Also go to mesis.org type in Bob Murphy or Robert Murphy and you will find dozens of his articles on our website. Ladies and gentlemen, have a great weekend.