 Last weekend at our supporters event in Asheville, North Carolina, I gave a talk where I proposed that mainstream economics is a broken discipline, both as an academic field of study and as a profession. So here to discuss that all-important question, is economics broken? Is our own Dr. Joe Salerno, our academic VP here at the Mises Institute and a professor of economics at Pace University in New York and Auburn University here in Auburn. So stay tuned for a fascinating talk about whether economics is truly broken with Dr. Joe Salerno. Well, Dr. Joe Salerno, welcome back to the show. You know last time you were on, believe it or not, was January of this year and we didn't yet know at that time that Trump would be the Republican nominee so we were talking at that time about whether and how the various candidates might talk about money. And so fast forward 10 months and we have heard a little bit from Mr. Trump about money. Talk a little bit about Trump. Here we've got a real estate developer. If there's anybody who could make the case that some people are unjustly enriched by artificially low interest rates at the expense of others, it would be Trump. What's your take on what he's said or hasn't said about the Fed so far? Well, he hasn't said that much, but so far it's been good. He's been suspicious of the Fed. He came out and criticized Yellen's statement and the Fed's decision not to raise rates yesterday. In the past, he said that it would be great if we could go back to a gold standard, though he did not make a commitment in any way. He definitely does not seem to be tied into the financial elites who are always plumping for the Fed to keep interest rates low and they're always defending the Fed. I read recently that Yellen fears a Trump presidency in the sense that he, at least from her perception, would rock the boat and I think we have to view that as a good thing, if that's true. Yeah, I agree. In fact, some of his statements have been contradictory, but overall he's been talking against these super low interest rates and maintaining them into the future. So I think that is really making her nervous because if you think about it, when they made the announcement about keeping rates steady, the stock market jumped, long-term bond yields fell, and so you can tell there's a bubble. The financial sector is really unstable and so even a small rise in rates that indicates continuing rates rising into the future may very well collapse the system, at least certainly the bubbles in the system, including student loans. But don't you think we've entered into such a bizarro period that even a lot of mainstream economists and mainstream financial journalists are starting to say it's a bit bizarre that we're sitting here waiting on baited breath for this latest pronouncement, whether the Fed's going to raise interest rates a quarter point? Should that really rock our world so much? No, it shouldn't. In a sound economy, we have a sound money, that wouldn't happen. Our economy has become tremendously over-financialized, the real economy. The real economy has been forgotten in all this, and the reason is, of course, the monetary fine-tuning that has gone on since the 90s, these bubbles, the tech bubble and then later on the housing bubble, and now we see a bubble in a number of areas. These unconventional monetary policies have created a sort of financial monster, and now that monster has to be fed by super low interest rates. If it's not, it's just going to dissipate, it's going to die, and they're all afraid of it. I mean, the financial economists, the people on Wall Street and so on. Well, Hillary, for her part, certainly seems to support the monster. She's been mostly silent on debt and the Fed, except to issue a little warning the other day to Trump that he shouldn't criticize it. Is your sense that she is completely comfortable with the status quo, the sort of technocratic Janet Yellen management of our economy? I think that's exactly what she wants. She's very, very comfortable with technocratic management. She doesn't want people to say anything. She wants him to believe, well, we're taking care of everything. We're the experts. The less you know about what we're doing, the better off you are. She's very anti-transparency, where at least one of Trump's themes is more transparency. Do you believe him? Do you think Trump would appoint a decent secretary of the Treasury, for example? I don't know. I don't know how much of what Trump says we can believe. What I think is that he's not a political insider, and he may make some good appointments. It seems like he's kind of said support. Trump tend to be sort of supply ciders who aren't, you know, they talk a good game about gold, but they don't want to go back to a true gold standard. But I think he would listen. He would be open-minded in these areas because he really knows that he does not know everything about that area, right? So he might think he knows everything about how to stop terrorists, but he hasn't. He's been pretty open-minded on the economy. I think with Hillary, we know what we'd get, right? In terms of secretary of the Treasury, we'd get someone like Larry Summers, presumably. Larry Summers or somebody from Goldman Sachs. I mean, yeah, those are the people that we would get. It would just be more of the same. And, you know, eventually, I think we are going to have an inflation in consumer prices. Of course, we have inflation and assets. And what I fear is that if it does break out that they're going to turn to wage and price controls, I mean, this is my big fear. I I've thought about this since the early 2000s. I've mentioned this to people. And since consumer prices didn't explode upward, you know, we never got it. But that's in the back of my mind. And she would love to be involved in, you know, really planning the details of the economy. And that's scary. Well, today, Bill Bonner had an article on the LuRockel.com website talking about QE and whether additional rounds of QE will be necessary to keep this whole thing going. And he makes the interesting point that QE really represents a form of theft. In other words, it's a wealth form of wealth transfer from savers to speculators. And I'm wondering if you could elaborate on that. I don't think people I don't think ordinary people really see QE as stealing from them. You know, look, all of these unconventional monetary policies, including QE and negative interest rates now and so on, are what we would look at as a giant wealth transfer scheme that's not transparent. So what's happening is that, you know, the banks are getting money at very, very low rates and they're able to lend out at rates that are a little bit higher. The savers, the people are putting their money into savings accounts that, you know, 0.01% and so on are the ones that are getting hurt by this. Their pensions are being hurt, the incomes that they've been depending on for when they retire, they're not growing. So in that sense, yes, it's financial repression, it's pushing down interest rates to benefit the financial sector and the people that obtain funds from that financial sector, the people that invest the funds in the financial sector, the small savers and so on. Because remember, governments and corporations are the biggest borrowers in the country, right? So the small savers are the ones that are getting hurt, middle income people, lower income people. Well, I've noticed there's been a shift lately. If you recall, ever since the crash of 2008, when the Fed started rapidly adding to its balance sheet via QE, the President of St. Louis Fed and other Fed officials have told us many, many times that this is an extraordinary period, and that someday the Fed's balance sheet would return to something like normal, something like pre-crisis, pre-08 levels. And now Ben Bernanke, coming out of the Fed's meeting in Jackson Hawaii, is saying, hey, maybe it's time to rethink that. So this seems like a huge, but subtle shift in what Fed and former Fed people are saying. They're now saying that maybe the Fed's balance sheet is a permanent thing and that extraordinary monetary policy is the new normal. Yeah, absolutely. That's what they're saying. And they're now coming up with sort of ex post facto justifications of all this. They're saying things like, well, you know, interest rates are going to remain low into the future, the natural rate, which is what they're aiming at, the natural rates are going to remain low in the future, because, for example, we're going to get all this savings from the wealth you're emerging economies. So our economy is going to be glutted with savings that's going to push interest rates down. We have aging populations and aging populations with shrinking workforces means slower economic growth. And with slow economic growth, you don't want to raise the interest rate too much, you know, you got to be careful because that could collapse the economy and go back to no growth. There's low productivity now worker. They cannot explain. And let me take a step back, actually. The Fed about four or five years ago said that long term growth will return to 2.5 percent per year. Then just this past June, they lowered that number to 2 percent. Now at this latest meeting, their expectations are 1.8 percent long term growth going into the future. And the reason is there's a productivity slowdown, labor productivity, the amount that workers produce per year has gone down and they don't know why they've all admitted this. Well, we Austrians know why. We know why there's been tremendous overconsumption that is due to low interest rates that drove people's housing prices up and and their 401ks up, which which caused them then to reduce their savings during the 2000s. And the other reason is what what Austrians call amount investment. So a tremendous amount of capital was invested in the wrong things and housing and and other things. And in fiber optics in the 90s. As a result of the tech bubble in the 90s, it destroyed a tremendous amount of capital and then the the housing bubble in the early 2000s. And then what we have now. So capital is being destroyed and it's also being unwittingly consumed by people who should be saving it for the future. And with less capital, you have less machinery and investment in factories and lower labor productivity. That's why our real wages have not really been rising. But why is this such a mystery? Let's take the the Fed's economists. Economists actually work for the Fed. Apparently there's about 300 of them, many in the Eccles building, many of them with Ivy League degrees and presumably quite intelligent. What what do they learn or not learn as they obtain their PhDs in the economy? What how do they view money and monetary policy? Why are they so seemingly clueless to the facts of life as we see them? They don't understand the interest rate. They don't understand the fact that the interest rate is not a tool of government, that the interest rate is an expression of how people value future versus present goods and money. And that the interest rate pervades the market economies determined by the market economy. And when it's distorted, it causes misallocations. Just as if the government had raised the price of let's say apples. Suddenly everyone would be investing in producing more apple groves and apples and so on. And we would have a malinvestment in that respect. And a lot of that capital that could have been used to produce more cars and medicines would be destroyed. Well, that's what's happening here. That's one thing they learned. The other thing they learned is that interest rates are not an expression of how people feel about the present and future and in their savings. But interest rates are a barrier to investment. So if you push interest rates very low, everybody's going to borrow and invest. Regardless of what profit prospects they see in the future, regardless of the fact that the employers might worry about the expensive Obamacare, for example, or getting into another war. So there are many factors that affect investment. It's not just manipulating the interest rate. This is what Keynes taught the economists wrongly now who are getting their PhDs. That's still in the textbooks. That the interest rate is something to be manipulated. But it seems like there's almost a mania for borrowing and consumption over capital accumulation and saving. Well, how did this occur? I mean, this seems like a profound shift in our thinking. Yeah, I think it began to occur in the 1990s. I think when interest rates pushed down in the 1990s and then again in the 2000s, as I said, people saw the value of their stocks going up, the value of their houses going up, and they said to themselves, we don't have to save as much for our children's tuition, for our own retirement, or for any other comforts that we may want in the future, because of the falsely increasing value of our assets. So we can go out and spend most of the income that we're earning now and just allow our assets to appreciate. And so that really got us into this consumption binge, which went on through the 2000s. And you know what? The next generation has picked that up. So the millennials, you know, that's now becoming ingrained. If you look at any Americans closet, their closet are stuffed with clothing. I mean, there was a retail boom that was amazing, you know, in the 2000s. And those were all capital goods. But when we talk about the 1990s, it almost seems like that might as well be the 1890s. Is it true? Is it possible for a young person today to obtain a PhD in economics, knowing little or nothing about the history of economic thought? In other words, it's like we're just dropping them onto an island today? What they're learning in economics has nothing to do with the real world. I've just been reading two new books on macro, just to catch up on what modern macro is, you know, and what they're telling students. And basically, these new books, which haven't gotten to the students' textbooks, fortunately, say that the models that are made up in macro to explain the economy really have nothing to do with the economy. And you can make all of these ridiculously false assumptions. I mean, even to more extreme than Milton Friedman's whole idea that not every assumption has to be realistic. So what they're doing is they're making up models that have an island with coconuts and it has two or three people that are trying to trade on it. And they're coming up with conclusions about the real economy, about what we should do with interest rates and how we should conduct monetary policy out of these simplistic unrealistic models. It all shows off your mathematical proficiency. So they learn nothing about the real world. It's the bottom line. Would you say that mainstream economics today is broken? Are things that bad? Should we be that worried about what goes on in academia, but also amongst professional economists? Yeah, it's completely broken. I mean, there is a soul searching going on in economics right now. And there are a number of books that have come out. I mean, they're certainly not by Austrians, but one book I'm reading is questioning the whole idea of just having this view of the economy that you can really play a game, set up a game, and without any theory, you can come up with sort of results that mimic the results of a real economy. So whether or not it's realistic, if it mimics what happens to consumption, what happens to investment and output, well then, well, that's a good model. So economics has lost the theory. The great thing about Austrian economics is that it starts with a theory, it starts with a human being at the center, a human being striving to satisfy his or her wants, and then builds up a whole theory of the economy, including business cycles and the interest rate and so on. That is not done today. People just look at these macro data, they look at what income is doing and so on, and then they try to come up with these mathematical models that mimic that. So yes, macroeconomics in particular is completely broken. They know it, and there is some soul searching, but they'll never get back to saying economics, you know, really Austrian economics is going to have to displace the main screen, okay? We can't teach them, we have to teach the students coming through. Well, it's a very scary thought, if economics is broken, then we wonder about our actual economy itself. Joe Salerno, thanks so much for joining us, and ladies and gentlemen, have a great weekend.