 Our next speaker is probably well known to most of you, Dr. Bob Murphy, of course a PhD economist from NYU, also an associated scholar with the Mises Institute, affiliated with the Independent Institute in Oakland, runs his own blog, Free Advice, and of course he's one half of the duo known as Contra Krugman with Tom Woods, the weekly show that dissects Paul Krugman's latest pronouncements, and he's got a great new book out that's actually on the primal diet, Bob writing about the economics half of it, he co-authored it with a medical doctor. So here to talk to us today about what the Fed can and cannot do in 2016, Dr. Bob Murphy. Well thank you, Jeff, for that kind introduction. I just want to thank everyone for showing up. We realize at times like this that it's concerned citizens who really are going to turn the tide if that's going to happen, and so it's people like you who come to events like this that are really going to be the important ones in terms of the sweep of history. I do just want to address one thing that Jeff had said earlier in his remarks that really resonated with me. If you remember, he said that there's this stereotype that we're really trying to dispel that libertarians are men without stomachs, and I can personally say no one has ever accused me of being a man without a stomach. All right, we're on a tight schedule here, and I'm the resident economist for today's proceedings, so I need to talk about the Federal Reserve. This is normally a very dry subject, and I have to say I was completely wrong in terms of political instincts that when Ron Paul was first running in the O8 campaign, and I was thinking he was making a mistake. I said, you don't talk about the Federal Reserve. I have tried to teach college kids. They want to jump out the window when you start talking about open market operations, but yet he got people fired up as Corey was saying. He would show up at events and people start chanting, and the Fed, that was completely amazing to me, and so it encourages us to go ahead and teach about these things. I think it was Lou Rockwell one time said he said, well, the Fed's ripping us off, and that's very interesting. People want to know who is ripping me off, right? And so when you teach it in that way and show people the connections and they understand, okay, that's what these so-called open market operations and these federal funds rate and what all it has to do with when you realize how are these people ripping you off all of a sudden, you say, yeah, I'll listen to that. What do you got to show me? So I'll try to do that for you right now, and it also underscores why the Austrian school is so important. That sometimes you, I'll hear people say, look, I can't stand Keynesians, you know, Paul Krubin can't stand the guy, and but you know, aren't you guys, why do you focus on this Austrian school all the time? Are you just trying to do that for product differentiation? Or is it just some odd little thing that you want to be different? Why can't you just be a free market economist? Aren't you and Milton Friedman and those guys, the Chicago school, aren't you all basically anti Keynesian? And it is true when it comes to a lot of policy matters that people from the Chicago school are very free market, you know, they're skeptical of rent control, minimum wage, high taxes and so on deficit spending. They don't think that politicians directing resources is better than people in the market generally speaking. But when it comes to central banking and monetary policy, that is one huge difference between the canonical Austrian school and the Chicago school, even as epitomized by Milton Friedman. And in particular, for those of you who are really wonkish and you follow the blogs and the analysis of what's been happening the last several years, there is now a rising current within free market circles, they call themselves market monitorists, right in that word market meaning, you know, we are for the free market where, you know, libertarian, there are often many of them would call themselves libertarians and their diagnosis for what has been ailing the world economy since 2008 is that as they describe not put words in their mouth, they say that monetary policy has been the tightest since the Hoover administration. Okay, so we don't have time here to get into the minutia of how could they come up with that, but I just want to make you aware that there really is a growing movement of people who can look back and realize, all right, this clearly isn't working. And so they conclude that Bernanke was too tight fisted that he wasn't willing, he was too timid. All right, and so you can see how in that environment, and again, these are not Bernie Sanders type people. These are a lot of people that consider themselves libertarian and generally fans of the free market. So the way they couch that, if you remember, for those of you who know, Milton Friedman's famous explanation for what happened, why was the Great Depression so awful, he said because the Fed chickened out when there was the stock market crash in 29, then the early 30s, people were panic running to commercial banks, pulling their money out. And according to Milton Friedman, the Fed should have pumped in a lot more money to satisfy that increased demand and the Fed foolishly didn't do enough. And that's why we now look back at that as the worst crisis in U.S. history. So similarly, they think that the Fed was asleep at the wheel. And really, when you want to understand how did things get so bad and why have we not fully recovered, a lot of self-prescribed free market economists would say it's because there hasn't been enough inflation. So in that context, you can see the importance of the Austrian school. So let me show you the charts. Now I have a few charts. I realize it's hard to see, but in retrospect, I think this is good because I'm going to say some things about where I think things are headed. So if it turns out I'm wrong in three years from now, you come and yell at me, I'm going to say, no, you just misread the chart. It was too far away. Okay. So in all seriousness, if you want to see this stuff, go email me or I think the Misesons is going to have it on their website, some version of these remarks. But if you can see what that is, it's the point is saying the Fed's been driving the stock market since the 2008 crisis. So this is unusual. If you looked at a broader timescale, these two lines would not line up like this. And this is generated from the St. Louis Federal Reserve site. And so it's not like I had to doctor this graph. This is just how the thing lines up. So you can see the eerie connection fits like hand and glove. So what that blue line is, is the S&P 500 index and the red line is the total assets or the the monetary base, excuse me, of the Federal Reserve. So that's like one measure of the money supply. It's the currency in circulation in the reserves that commercial banks hold on deposit with the Fed and money in the actual vault. Okay. So that's money that the Fed directly controls. So you can see that's the tight connection there. And in particular notice when the QE programs temporarily halted, then you see the stock market took dips. Okay. So it's I'm a bit far away from the laser pointer, probably to reach that. But you can see there and that that first thing that I've highlighted how the blue line drops down. And then later in the second stretch there, the blue line drops down. And so those red lines leveling off, that's showing you that those were that was the end of QE1 and the end of QE2. All right. So remember quantitative easing those rounds of expansion where when the Federal Reserve came in and started buying ultimately would be trying to be trillions of dollars of mortgage-backed securities and treasuries. All right. Incidentally, just a note of cynicism. I just want to point out, you know how we have the independent Federal Reserve, don't keep making me do air quotes, but the independent Federal Reserve, notice that they decided this, you know what I think what monetary policy tells us to do is to start buying trillions of dollars of treasuries right at the time the Obama administration's fiscal department said, you know what, I think what we need is to start running trillion dollar deficits. So I know those two people don't talk to each other at all, but I suspect that it's not so independent after all. So but so notice though that when they stopped that, so when the red line levels off there, that's showing the feds, you know, will stop pumping money in and that's when the stock market started tanking. And if you remember, it's not merely that I'm exposed showing this correlation here, but in fact, if you think back to what the fed officials were saying when they would start another round of QE, they would say things like, well, the economy clearly is running up against headwinds and they might have even explicitly said the future looks bleaker than we thought based on market indicators such as the stock market. All right. So they were openly admitting that, yeah, the reason we're going to go in and start buying more assets now is because the stock market is starting to turn. All right. And then you can see in particular that the big drop that happened last August, remember when the stock market really fell significantly, it was down something like 10 percent depending on what level you were looking at. That was occurring. That's the one spot in this chart where the red line doesn't dip down too much, but that was because that was right before what was supposed to be the first rate hike. All right. So again, if you forgot, the Federal Reserve took rates down to basically zero back in December of 2008 was when they finally bottomed out and then they had been stuck there and they were originally scheduled to start raising rates up to 25 basis points back in September, but because the stock market fell so significantly and people were talking about China and that was certainly involved, in August, that's when the Fed pushed back its decision. All right. And so that's market bounced back once, oh, okay, they're not raising rates. So the market recovered. And then that last one that I've indicated, that's of course what's been happening since January. So the stock market having the worst opening week in U.S. history, again, I don't think it's a coincidence that it happened right after they raised rates. And you can see, again, that the red line dropping is to show what happened to the so-called monetary base. Okay. So very quickly, let me just say, Austrians are not chart followers. It's not that we just draw a bunch of curves and look at that. In fact, that's usually the antithesis of Austrian economics. I'm just showing this because a lot of people get skeptical and they say, oh, you Austrians are perma bears. Yeah, yeah, the world's always going to collapse. Every time the market drops, you guys blame the Fed, give me a break. And I'm looking at this and say, I'm nuts for thinking that the Fed has something to do with the stock markets in 2008. And if you just think through logically, look at all the stuff that they've done in terms of the real economy. They had Obamacare come in or Affordable Care Act, if you want to read about how bad that's going to be. And we have the book outside the primal prescription that Jeff alluded to where we go through that. And a lot of the stuff that we predicted in that book is now coming to fruition. Even many progressives are agreeing, this isn't working. The Affordable Care Act is not doing what we thought it was going to do. So their solution, of course, is to say, that's why we need single payer. We were silly for wanting to have these pesky insurance companies getting the way, what were we thinking? Let's go straight for socialism. But nonetheless, everybody can agree these halfway measures aren't working. The idea that the government coming in and taking over healthcare is going to contain costs, that's crazy. So also, we're running trillion dollar deficits. So in a normal time, regular economy that wasn't just facing a huge collapse, the Obama administrations and also the Bush administrations, the tail end, the huge deficits there unprecedented in terms of peacetime, that would have been very damaging. Most economists would have agreed. So they're doing all these things while the Federal Reserve is doing all this stuff and the stock market's booming. So that doesn't make any sense. Even in normal times, you would think that'd be bad for the economy, let alone right after a global financial crisis. So what does make a lot more sense to me is to say that this recovery has been phony, been propped up by cheap money. And again, this is not just something that Austrians are saying ex post, and we're just looking at charts. There's a whole well developed theory. Obviously, I don't have time to get into it right now with you guys just very quickly. The Austrian view is that market prices do something. It means something if the market prices a certain value and interest rates in particular, they have a job to do. And so if the central bank comes in and makes the interest rate something different, that's going to screw things up because the interest rate communicates information, it helps entrepreneurs make economic calculations when they're looking at various projects, running numbers and trying to make decisions. And so if the interest rate in a market undisturbed by central bank intervention would be let's say 4%, and yet the Federal Reserve comes in and pushes it down to 2%, whatever relevant rate we're talking about, 10 year bond or what have you, that's going to screw things up. If money really shouldn't be, credit shouldn't be that cheap at 2%. And so in particular, when you think through what do business people do, long-term projects, the lower the interest rate is, the more those get favored. If you're doing something that's really short, you're just going to buy some hot dogs and buns and have a hot dog stand out in the street and turn your inventory over pretty quickly, the level of the interest rate doesn't factor that much into that particular project. But if instead you're going to build an apartment complex where you're going to spend $10 million, let's say upfront, laying concrete, hiring workers, building this huge thing, and then you're forecasting how much net profit and that income am I going to earn over the next 20 years from this project, well there, the interest rate in those calculations is hugely important. And it makes a big difference if the interest rate is 4% versus 2%. So the Austrian view is that when the central bank pushes down interest rates, that gives a false signal. It gives a green light, if you will, to entrepreneurs to start longer-term projects. And for a while, things look good. Everybody's happy. The businesses are hiring workers, people are laying concrete, so-called idle resources are being put back into use, and that looks great. It looks like the recovery's here, but the problem is there's not enough genuine savings to bring all those projects to fruition. You don't make the economy richer by the central bank just creating numbers on a computer spreadsheet and buying assets that the week before were called toxic assets. That doesn't make any sense. You don't create prosperity by trying to wipe out billions of dollars of bad decisions by investment bankers, by the Fed just doing computer operations. That can't be true. If it were true, then humans should never have to worry about economic scarcity, if we can just fix everything by computer entries. So the Austrian view is perversely, you can get by for a few years with that illusion. You can maintain it. You keep pumping in more money, but eventually it's going to come crashing down. And the longer you postpone that reckoning, the more severe it's going to be. Thus far, I've just given you the standard Austrian view, but let me tell you a little bit about why this time is different. And when I say this time is different, that's like a catchphrase meaning things that used to blow up on our face before, don't worry, now this time is different. That's what people mean by that. That's not what I'm saying. Let me be clear. I'm being very pessimistic. I'm saying, yes, the stuff that blew up on our face before will blow up on our face this time too, but it will just hit like a different part of your face. That's what I'm saying. So this time will be different. Okay, so if you see here, the difference is that that blue line is dropping down compared to the red line. So that the, what I'm showing you, the red line there is the Fed's assets. Okay, so you may have been confused. Those of you who are really wonkish and follow these details carefully, what the Federal Reserve had the so-called taper, maybe that means something to you, where they slowed the rate of asset purchases. And then Ben Bernanke, he's a crafty fellow, he started the taper and handed over the reins to Janet Yellen right when that thing started, right? So he was like, here you go. I'm going to go write my memoirs. Good luck to you, right? And it's funny how these people, if you go back and look, I don't have time to recapitulate it here, but if you go back and look from when a new Fed share would come into power, there was a big crash often within a few months right after that happened. Start with Volker and just go forward and look, I think Greenspan was the closest one when he came in all of a sudden, there's a huge 87 stock market crash. So it seems like there's a hazing ritual, if you will, for this elite, for, well, now it's a sorority too, where they, you know, the new person comes in and they go, huh, worldwide crisis. There you go. And then, all right, you get over here and they ruffle their hair and then they let them blow up their asset bubble. They give them high fives and then so forth. Okay. So here, what you may notice, though, is what I'm trying to get across is that the, the taper went into effect and then it ended. So the Fed has been sitting on a constant give or take level of assets for a while now. That's what that horizontal red line is showing you. All right. So as their bonds mature, they just roll it over. So they're not on net acquiring more assets. So they're sitting around, I'll go 4.5 trillion dollars, something like that. Right. So the blue line dropping though, that was the chart earlier that I was showing you, how that's come way down in the stock market's been tanking since they raised rates. So what's happening is the Fed is doing things that are temporarily sucking reserves out of the system, but the Fed's not selling off assets. Okay. So that's why what I mean, I say this time is different. Normally in standard textbook economics, when the Fed wants to tighten, they sell off assets. Okay. So they sell off assets that sucks. I'm speaking loosely sucks money out of the system. So the banks now have fewer reserves to lend to each other. And that's why the interest rate goes up. Right. Because now there's less, less money that the banks have. I'm again, speaking loosely here. So what they want to do, the Fed wants to do now, though, they still want to start raising rates because they think it's time to start doing that, but they don't want to sell off assets because again, they're sitting on trillions of dollars of mortgage-backed securities and treasuries. And I think they realize if we start undoing all these rounds of QE, we're just going to crash the whole system again. We'll crash the housing market. If we start selling this mortgage-backed securities, we'll crash a lot of these big investment banks on Wall Street. If we start selling off treasuries, it will become a lot more expensive for the federal government to roll over this huge debt now that they've built up. That's $18 trillion, what have you. And so they realize we can't do that. So they've painted themselves into a corner. They solve the 2008 financial crisis by pumping in trillions of dollars of money into the financial sector. Now they kind of want to walk away from that gently, but they don't want to give up what they did. And so they're trying to have it both ways. So what they're doing in the meantime, it's called reverse repo operations and you can go look that up. Again, I have something I submitted to Mises.org. You'll see it if you want to see more of the technicalities, but they are basically temporarily buying those reserves from the banks and then selling them right back to them. And so that's what's showing up there with the drop in the blue line because the banks temporarily are not holding tens of billions of dollars of reserves because the Fed's sucking them back when they bring them right back. The other thing they're doing is paying interest on reserves. And what that means is, and this is a new policy they instituted in October of 2008. So the Federal Reserve is saying to commercial banks, if you keep your reserves parked with us, we will pay you interest. And so what would a commercial bank do? They'd either keep the reserves parked at the Fed or they would make loans to people. So that's a way to increase the interest rate because the Fed, what they just did in December, and this was sneaky, they didn't even have it in the normal like announcement to the press. If you just Google Federal Reserve December 2015 statement, they don't say it there, but they bumped up the interest rate they are paying to commercial banks to keep their money parked at the Fed. So the way I like to describe that is to say the Fed has been paying bankers to not make loans to people. That's not the way they describe it. That would be kind of an awkward PR problem, but that's a true statement. So again, simultaneously, while they started buying up all these toxic assets, and remember they told us, oh, we hate the people on Wall Street. We can't stand those rich fat cats, but we got to bail out them to keep credit flowing to Main Street. While they were doing that, they started paying the bankers to not make loans to their own customers. And again, they're doing that because they pumped in all this money in one part of the system and they didn't want it flowing around elsewhere because then prices start rising and things get out of hand. So they were doing what they could given, you know, guys, here's the player we're running, make it work. So I can, I really do feel bad for Janet Yellen that she's got to deal with this. You know, she inherited this mess, but that's what they're trying to do. They're trying to start raising rates, but without selling off assets. And so that's the way to understand a lot of these things. So in all this, what is the conclusion? The conclusion is it's not going to work. They may postpone the inevitable for a bit with these maneuvers, but they're ultimately trying to have their cake and eat it too. They tried to fix things by just buying a bunch of bad assets, pumping in money, that what didn't represent real production or savings, interest rates have been wrong for seven years at least. And so that has given businesses the wrong signals. What do you need to diagnose this and to know what do I do to go forward? You have to at least know basic economics. You have to know Austrian economics. And that's why the Mises Institute is so important. For those who are undergrads in particular, I would strongly encourage you to consider going to Mises University where you get a week long instruction in this to at least know what's going on so that when your populist friends are angry and mad at the world, you can at least say, thank you, you're right, you should be mad at those people. But here, let me tell you the rest of the story. Okay, thanks everybody.