 Our next speaker this afternoon is Douglas French He's the president of the Mises Institute and his lecture this afternoon is on money in banking Thank you. Thank you. Is this on okay? Well, I've been selected to do this lecture because of my many years in the banking industry Which provides me absolutely no background to give me the speech, but however I'm the one that's been selected. I wanted to mention something that was in a Profile of Jim Grant that was if you don't know Jim Grant Grant's interest rate observer is a Wonderful publication to read. It's horribly expensive, but Very very valuable, but Jim Grant was interviewed by the Wall Street Journal recently and he said He made a comment about dollars piling up in Asia merchandise piles up here and The point was that America Because it has the printing press has tried to achieve the ancient hope of mankind To live without working Now Joe Salerno mentioned this in his talk this morning that if money grew on trees Nobody would work right and the same applies that if everybody had a printing press Would you work? No, not at all. It wouldn't work at all. You just print money and exchange it for goods and services And that reminded me that quote in in the Wall Street Journal from Grant reminded me of a book called Farmer Boy written by Laura Ingalls Wilder and She wrote this book about a boy named Al Monzo Who I won't go into the whole story But Al Monzo wanted a little money to buy some lemonade when he was in town and his father decided to give him a half dollar and So it was a half dollar something like like that Not an upside-down one maybe like that We'll try to Telescope that so you can see it a little better And yeah, there we go. That's a 1957 half dollar That coin is as old as I am I Dare say it's in better shape and certainly Has held up a little better than I have but Anyway, that's that's 57 coins similar to the story that Laura Ingalls Wilder was telling and so after giving his son the half dollar His father asked him, do you know what the half dollar is? Now Monzo had never seen anything beyond a penny or a nickel so he didn't really understand What he meant and ultimately said that it's work son That's what money is. It's hard work and it really in my mind displays the difference between other Economic schools of thought and the Austrians because I think for the Austrians I can the money is work. It's hard work but for other disciplines that are very undisciplined in Economics Money is just something you can print out of nowhere There's no savings. You can just print savings so on and so forth So and that's that's the way I want to start this today, but you know money doesn't and It did not and it could not originate by the order of the state It must originate with the processes of the free market And before there was money there was barter Goods were produced by those who are good at it and if there was any surplus in those goods That they produced they used the excess goods Not just for their own use but to trade with others as barter and of course We all know a number of things have been used as barter you know shells and tobacco and cigarettes and Prisoner of war camps and things like that ox has somehow been used as money We've heard about all these things. We don't need to go through that, but that's how barter started These were generally recognized goods that everybody recognized the value of and people traded those goods to Get the things that they want now their problem with barter Presents itself very quickly and that's the double coincidence of wants For you to trade With someone they have to want what you have and you have to want what they have and That's a that's a problem, right? I mean, I think a lot of trades could be made in this room But it doesn't always mean that you have what someone wants and Vice versa, so that's the initial large large problem that you have with With barter the second problem is indivisibility You may have a good somebody wants, but you don't have the quantity they want or you can't You can't Make it less or make it more can't Divide it up. It's kind of like going to Costco You know if you go to Costco if any of you have been there You can't you can't buy a tube of toothpaste you have to buy a case of toothpaste or something like that So you've got this problem in barter with indivisibility another problem is business calculation Business firms must be able to determine whether they're earning a profit or a loss and that is impossible impossible under the barter system, so since Not many people want to trade for what an individual person has the excess of he or she must buy other goods to trade with So a lot of times you will trade with things that you don't necessarily need But you know that they'll be worth something As far as a medium of exchange people trade labor and goods for a medium of exchange And that's what any of you that have a job do this all the time If you have a job you're trading for a medium of exchange you're trading For money so that you can buy what you want medium of change is that? Instrument of indirect exchange Now as as people See that a certain commodity is used as a medium of exchange has a high marketability Its use becomes money And money is a huge leap Forward in the history of civilization it prevents It permitted man to overcome the obstacles of barter it permitted Man to overcome this double of Coincidence of wants the indivisibility problem and most importantly this Problem of business calculation we can now calculate whether business is profitable or a loss Because we have this medium of exchange So what determines money's purchasing power How is that determined? Well, Mises Did some work that extended on mangers work and of course Joe talked a lot about manger this morning and What Mises his extension of mangers work he developed the monetary regression theorem monetary regression theorem and according to that is that The purchasing power of money today is based on What that money could be traded for yesterday or its purchasing power yesterday? And at the same time the purchasing power of the money yesterday Was determined by the demand for money which developed based on the knowledge of the purchasing power from the day before And we can trace this pattern all the way back to the moment when the first time in history people began to demand a Certain good as a medium of exchange Therefore this theorem reflects mangers theory on the spontaneous emergence and evolution of money Now the cumulative development of a medium of exchange on the free market is that the only that's the only way Money can be established Now I know you've probably had textbooks already That have told you under the definition money. It's whatever the state says it is Right. I'm I know I had that when I went to school But money cannot originate in any other way it must be created in the market through this regression theorem that Mises allies or lays out So Whether it's you or whether it's the government cannot suddenly get in the business of just printing up tickets that they call money And it can't happen that way It more sin to that but we'll get to that in a minute So what will be picked as money a commodity that Anybody want to take any guesses? I know I'm not supposed to asking questions, but what would be the first thing you would want for the perfect money Marketability, yes, generally markable. How about what's next what? Funja bowl. Yeah, okay Homogeneous maybe is another way to say that what else? Divisible. Thank you Durable. Yes Yes Yes Yes, same thing. You're missing one No All right High value per unit weight you want to be able to carry it around and still have some value with you There was a little piece in written by a guy and smart money over the weekend that I blocked about And of course, it's surprising how dumb people are who write for publications called things like smart money, but He seemed to imply that oil would be a better Money than well, he didn't actually put it that way, but I put some words in his mouth He he thought that he thought that oil was a better Better than gold and I would hasten to point out that carrying oil around is not terribly practical now Now over time two commodities have become dominant in the area of money and one is Silver and the other is gold so this is That's a Morgan silver dollar. Let's see if we can Zoom that up just a little bit and that's 1921 and then this this thing here And that's an ounce of gold from 1856 So these have traditionally been in money right here and They were both highly prized for their luster Their ornamental value who in the room would not want say this Anybody anybody not want it? No, right? In fact, you'd probably take any of that just because they look great, right? Possibly you might want to trade them for the goods and services you could get down on At Magnolia in college, but I don't know how that might work, but it's possible so but gold and silver are very divisible, and they're very durable Every ounce of gold that's ever been mined is still in existence and And it can easily be formed into coins now. Has anybody ever had a Textbook learned economics from a textbook written by Paul Samuelson Yeah, two three Yeah, a few of you and and in his 11th edition of something and and Samuelson made a lot of money writing textbooks but he said that You know, he starts out kind of good that wampum used to have decorative uses and Then paper money became as began as warehouse receipts and Mint receipts and for so much metal and so on. He's he's pretty good so far But then he said money isn't wanted for money, but just it's only wanted to For used to get rid of he said money is accepted because it's accepted that was his big payoff line there I'll repeat that in case you didn't understand it money is accepted because it is accepted Which is terribly unsatisfying for an explanation, but that's it worked for Samuelson But anyway, my favorite The favorite thing that he wrote here is he he said by the printing of more and More or fewer zeros on the face of a bill a great or small amount of value Can be embodied in a light Transportable medium medium of little bulk. Okay, so he's implying that you can just print numbers on a bill and Create the value that you want so this is of course one of my My favorite bills will get to we'll get this real money out of the way for the big show Which is this from the Bank of Iraq? back when they were and That handsome guy when he's still had a head on his shoulders Anyway 10 10 10,000 dinars There you go. So anyway, they created value according to Samuelson they created value with this bill and in fact He makes a statement by careful engraving by careful engraving the value of money can be protected from counterfeiting an adulteration The fact that private individuals cannot create it at will in unlimited amounts keeps it scarce IE and economic and not free good So if we just trust in the government then the government will make sure that money will become a scarce Economic good and you know when 50 trillion just won't do it We end up we end up with that so But that's a view of Samuelson and a few of us learned from Samuelson And that's why some of us have to come to Auburn to relearn some of these things, but Anyway, I wanted to you know when Samuelson said money was scarce by the way Samuelson was born in 1915 and and he died at the end of 2009 when Samuelson was born the M2 money supply in the United States was seventeen point six billion dollars seventeen point six When his first textbook was published in 1948 the M2 had grown to a hundred and forty eight billion and By the time he had died at the end of 09 he The M2 had grown to eight point five trillion dollars So while the great textbook writer Samuelson said the government was going to keep control of Of the money supply and keep it scarce and an economic good It hasn't exactly worked out that way now speaking of the supply of money. What what should it be? What should the supply of money be we get that all the time? But as Murray Rothbard always wondered, you know economists could never ask the question why Why should the supply of biscuits or shoes or titanium or anything else? What what should the supply that be? In any other good we leave it to the market to decide right? But when people talk about the money money supply they have this preconceived notion of what it should be And it should be more it should be less But money of course is different than biscuits for obvious reasons, but the more biscuits they have we have the better off we are and The the more plants and equipment we have the better off we are and the more plants that produce biscuits We have the better off we are this is not the case with money Murray made the case Money's different because money isn't used up in Consumption or production despite the fact that it is indispensable for production and exchange of money money is simply transferred from one person's assets to another So having more money doesn't make us any better off Mises wrote that any supply of money is Equally optimal to any other It doesn't matter what the supply of money is and in fact if overnight everyone's Cash balances were doubled society wouldn't be any better off Because real resources labor capital goods natural resources productivity none of that had changed Prices overall would double no one would be better off with the exception of those Well, who would be better off? Well People in debt. Yeah, okay, but I'm going for something else Thank you the first receivers because the first receivers who get the money the people who grab it out of the sky first Presumably the taller people Yeah, Ming or whoever that guy is it just retired Could grab the the money first run over to McDonald's build build up the the price of Jeff Tucker's favorite food Big Macs and And of course Jeffrey would be worse off as the rest of us be so the markets But the market's perfectly capable of deciding what the money's supply should be No need for it to keep up with the population growth or any of that That's something we always hear about gold by the way is that there's not enough gold Can't have any gold can't be money. There's just not enough of it And it's just not true. I remember Murray saying in class You could have a gold standard based on one ounce if you wanted to So there's just no such thing as a proper supply of money Now for gold to be money, how would gold be money the only way that gold would be money and the only way it would be mined for money is that The cost of mining would be less than the value that it would have as money Right if if it cost more to mine the gold then it was worth in trading for other goods and services The money wouldn't be produced the mines would not produce that money Now there's another way to create money and that's called counter fitting Instead of it instead of going to the trouble and expense of mining gold or mining silver Mining diamonds or whatever platinum whatever that you might choose as a money You can counterfeit And counterfeiting is fraud if brass is pwned off as gold The seller who accepts the brass is being cheated along with everybody else and Counterfeit coins continue to circulate in the money supply Overall prices will will rise the new counterfeit money deletes the existing Value of the existing dollars counterfeiting is an inflation process that entered injures anyone and all legitimate money holders by having their purchasing power diluted So counterfeit again defrauds and injures everyone But not everybody it's harmed If you counterfeit who benefits Hello The counterfeiters Benefit first those who receive the counterfeit money first benefit Now the government's supposed to apprehend counterfeiters and they do If you want to go to jail Get in the counterfeiting business because they do not like competition So I don't care how good your copier is They'll find you so the counterfeiter is now the government And it was the invention of paper money that allowed government to really really really get into the counterfeiting business now Just to when we talk about these first Groups that get the money There are essentially two people who are two groups that are benefiting right now From getting the money first who is that two of them they both start with W Wall Street. Thank you. That's one. What's the other one Washington? Yes, very good Very good. In fact Jim Grant wrote The fiat dollar is an elite system. He says and Wall Street is supporting Is it's supporting interest group those nimble market savvy plugged in folks who know how to shuffle assets and exploit cheap? Funding from the Fed to leverage up their profits and soften the downside So when we talk about we generally talk about in in talks like this Who gets the money first yeah government of course and then government contractors maybe hella Burton and some you know, whatever other companies Dick Cheney owns but We gotta talk about Wall Street right now because Wall Street is getting the benefit of this free dough That's just gushing out of the the Fed that we'll see a little bit later. So So and who loses, you know who loses Hello. Oh Well, not okay. I was thinking more pensioners. None of you guys are on a pension yet or who live away far away from a government projects I Suppose low skilled workers. Hopefully you don't put yourself in that low skilled class, but anyone who is Who is kind of on the lower end of the totem pole is going to be harmed now Kings? Have been doing this forever. This didn't start with paper money started Centuries ago Kings would take the gold. They would call it in they would shave off They would call it sweating or crying or clipping the coins They'd end up with a pile of coins and they'd re coin it So they'd make the coins smaller keep them in the same denomination and make More coins from the shavings and this is how that was done now that was very slow As you can imagine and not terribly efficient. So when they got in the paper money business that's when this thing really took off and So the first thing they did Was they started creating Techets essentially or notes that Would Be redeemable and gold this is the United States silver certificate You can see at the top it says silver certificate and at the bottom it says $1 in silver Payable to the bearer on demand Some of you may have these stored away. Maybe grandma had them. Maybe your folks I challenge you to grab a handful of those head to the Treasury and see if they will give you silver It will be a wasted trip They will trade those dollars for a brand new crisp Paper once there is no silver to be backed by this dollar They used to have gold certificates same way the reading was the same you this This bill was redeemable in gold So Larry Parks supporter of the Institute lives in New York Actually made the analogy that this is like having a coat check guys have been to the to the opera or Expensive restaurant and you've put your coat away and you get a little coat check, right a little coat check to Give back to him to get your coat back at the end of the performance or at the end of dinner This is like a coat check Right here. This was supposed to wasn't really the real money The real money was the silver that was being held and that eventually you could turn this in and get your coat back So to speak or your money back But What do you suppose? There's no silver. There's no gold. So now all we have is coat checks but no coats is The best way to put it and as Murray Rothbard said that is when government is in seventh heaven When there is no money backing the dollar then They can print it as much as they want and of course the last Just slight semblance to any sort of monetary standard was undone by Richard Nixon in 1971 I believe it was a hot August day when he when he did that so And at this point We kind of enter into this Keynesian world where We're all sophisticated Nobody's old-fashioned wanting, you know to trade in gold. It's a barbarous relic as John Maynard Keynes used to say that whole gold silver thing is very Old-fashioned sophisticated people Are the ones who use paper paper money and in fact the smart money guy said that people who believe in gold are Wearing tin foil pants Whatever that means I had heard of tin foil hatwares. I had not heard of Tin foil pants wares, but the current current gold bucks would be put in that category so So the demand for money The money being a good like any anything else there's a demand for it. There's a supply of it and If goods and services supply and the economy the demand for money in exchange will also increase So again, if you have more goods and services, there'd be more demand for money and Historically goods and services have usually increased every year And this increase in demand for money will tend to lower prices over time Prices fell from the mid 18th century up until 1940 with the exception of a few war periods and Generally during the war they don't like taxing people directly to pay for wars so they'd rather just print money to pay the troops and the Arms dealers and so you have a you have inflation Now the demand for money is affected by the frequency in which people get paid The more often you get paid the less money you're going to carry but also there's technological changes that serve to lower the demand for cash and like credit cards and Credit cards if you if you're running around with a credit card you don't use much cash on you If you get paid all the time you don't need that And in fact the other technological change, and I don't know if you saw this in the New York Times is that Their money Paper money is starting to last longer And they're actually quite proud of it a Dollar bill will now last 40 months instead of 18 used to be every 18 months. They'd get worn out They'd have to destroy them and print new ones now. They last 40 months Now if you compare that to To this thing That's 1921 that dollars lasted a long lot longer than 40 months for crying out loud, but the the government these days believes that they're 40 months is a Wonderful thing, and that's why they're not printing as much money. In fact They you can see that on that in the 50s there Right here. They didn't print a few years 50s are kind of scarce. They didn't print any tans Here lately or tans over here lately And this year by the way is the first time they've printed more hundred dollar bills than they've printed singles If you can see that but slightly Any reason why? any guesses What no No Yeah, that's you're close enough for jazz Two-thirds of the hundred dollar bills end up overseas It costs a dime to make a hundred. You're right. It costs a dime to make a single So why not print hundreds and ship two-thirds of them overseas? That's a heck of a business. I'm telling you if any of you can get in that business Please do it if you can make something for a dime and get a hundred bucks out of it Man it doesn't get any better than that and that's what the Treasury is doing In fact, they paid the Fed twenty billion dollars in synergy Synergy to the Treasury that's the difference between what it takes to create money and and What you get for it so? the Creating money creating hundred dollar bills shipping them overseas because people overseas Think that hundred dollar bills are going to retain their value They have a lot more confidence in the United States Monetary system than I do for instance, but be that as it may that's a great business that they're currently They're currently in there are now more than seven billion pictures of Benjamin Franklin Floating around out there, but how long is the Treasury going to be able to get away with that? Who knows and that brings me to the Next question the public's confidence in money must be strong for the demand for money to stay high Demand for paper money is very volatile while the demand for golden silver is always high There's always a high demand for golden silver paper money. It's very volatile and The demand for paper money is driven by confidence Or the lack thereof the public in the viability of issuing government now public expectations In future levels as price levels as far and away the most important Determin of demand for money And of course Keynes by the way He considered people evil who held on to money For speculative purposes he thought that was the worst thing a person could possibly do and the government had to do anything They could deprive money That was be laying their fallow not doing anything so the demand for money rises if It's expected the prices will fall and The demand for money will fall if the public expects prices to increase Now that sounds a little backwards from what you might think initially, but that's so I'll just say it again Demand for money rises fits if you think prices are going to fall You're going to want to hold more cash spend it later when prices fall demand for money falls if you think Prices are going to increase you're going to want to buy it today's prices rather than tomorrow's Flationary price expectations mean lower prices Flationary prices mean higher higher prices expectations component of the demand for money speculative and Red reactive rather than a independent source force Now Mises outlined we get this question all the time too Because if you're an Austrian and We haven't had hyperinflation yet and everybody's going when are we going to get this hyperinflation deal? You guys keep jumping up and down. This is going to happen and Mises laid it out in three phases And this was based on the typical inflation process and it was based on German hyperinflation 1923 And he said in phase one prices don't rise as much as money supply And I think that's probably what we can say today is And it's because the public still has deflationary Expectations governments thinks this is great by the way they can keep printing with impunity boy This is great these suckers keep taking this stuff. It's wonderful. So that's phase one phase two instead of rising demand for money moderating Price increases a falling demand for money will intensify price for inflation So if you ask me where we are in this process We're we're not in phase two But could be any time phase three prices go up faster than money supply Then there's a shortage of money People urge government to print more money and if government does this prices and money spiral spiral Upwards the demand for money Falls to zero you've heard of all these stories about we were Germany Housewives waiting at the gate of the factory husbands bring in arm loads of bank notes Giving them to their wives who had a wheel borrow To take the money to the store to buy anything in sight Before prices went up by the end of the day and do not they did not want to leave their Wheel borrow unobtended Even if it was full of money because the wheel borrow would be stolen and the money would just be kicked out into the dirt And so by the way people asked what happens to stock prices During we were Germany what you know what happened and from 1914 1922 stock market rose And I'm not sure what index of use but it was from a hundred to eighty nine hundred So people not only unloaded into goods and services but also into stocks and They would rather speculate what happens in inflation as people would rather speculate Than work for wages and of course in 1914 The German mark was a quarter of a dollar by October 23. It took 25.3 billion Marks to a dollar and only a month later it took 42 point 4.2 trillion Marks for a dollar so that is currently ingrained in the experience of Of the German people now to switch over to banking You know loading banking is straightforward enough If I save and start a bank and lend money to people Or maybe I might channel people who who are willing to give up The current use of their money To lend it out for return. It's perfectly acceptable Line of business. There's examples of this Peer-to-peer lending. This is a relatively new phenomenon Certainly in the internet. This is something called prosper and you can notice that if you want to invest money You you can earn maybe 10.6 percent and if you want to borrow money you might You might borrow as low as 7.4. Obviously, there's There's going to be a spread between What people Get for their money who deposit it with them and and what people borrow and the spread is going to be Captured by this prosper company who does some loan underwriting and whatnot But this is matching up borrowers and lenders throughout the world and this is certainly legitimate Another company lending club Is another one and again? Investors are getting 9.6 borrowers. That's their lowest rate most of them aren't here's our friend sunny down here He's a featured borrower doesn't look like a sunny, but he borrowed nine thousand dollars at fourteen point oh seven percent And it's very happy to do so To pay off his credit cards, so certainly legitimate banking deposit banking Is of course the other side of the coin that is when you would put money in a bank and expect them To watch the money for you not to lend it out, but to Ensure that it's there to guard it to protect it and Unfortunately What has happened over over the centuries starting with the Starting with the goldsmiths who would keep people's gold and give them certificates For their gold they began to create more certificates and there was in gold and and so fractionalized banking was born but oh by the way, this is hard money lenders if you're looking for You know hard money loan a private money loan They're on the internet now to and again. This is legitimate loan banking That's out there whether you're multifamily project or what have you but I want to talk about three key cases in fractionalized banking Because a lot of people ask hey how this happened how this how this horse get out of the barn so to speak Well, 19 or 1811 car versus car the court had to decide whether the term debt Mentioned in a will included a cash balance in a bank deposit account and The master of the roles Sir William Grant ruled that it did and Since the money had been paid generally into the bank and was not earmarked in a sealed bag It had become a loan rather than a bailment Then five years later in vanes versus noble spite it attorneys argument that a banker is rather a bailee of The consumers or a customer's fund and his debtor Because the money in his hands is rather a deposit than a debt and may therefore be instantly demanded to take it up The judge the same judge grant ruled that quote money paid into a bankers and Into a bankers becomes immediately a part of his general assets and he is merely a debtor for that amount and Then later in Foley versus Hill and others Lord Continham ruled money when paid into a bank ceases all together be the money of the principal It is then the money of the banker It was bound to an Equivalent by paying a similar sum to the deposited with him when he's asked for it The money is placed in the custody of a banker to do with it what it he pleases and This is when it all went downhill in terms of In terms of fractionalized banking now the law has always been directly ambiguous in this area Justifying fractional reserve banking because it's ultimately fractional reserves Fractional reserves really can't Survive on their own economically They must be protected by government so This is the point where we we talk about How money is created through a fractionalized banking system and many of you have probably seen this thing before but And I used to do this a little different. I think a couple years ago We always assumed that the Fed was going to buy treasuries from a bank to Possibly increase the money supply, but I had to change the story in light of the financial meltdown The bar the Fed buys worthless collateralized debt obligations from JP Morgan Chase. So They buy this right here it ends up being reserves and we just we're going to talk about this as a 1,000 so here's what the balance sheet looks like some guy named Jones has a 1,000 bucks over here and demand deposit checking account like probably most of you have and then the reserves were increased by By the Fed buying some some of this toxic assets from JP Morgan Chase I don't know whether JP Morgan Chase had any toxic assets assets But you know, let's just assume they did for the purpose of this now the feds balance sheet looks something like this Their assets now are Maiden Lane That's the toxic assets. They bought anybody know why they're called Maiden Lane Because they actually are called Maiden Lane Maiden Lane is the name of the street next to the New York Fed and So they cleverly called the bailout Assets that they bought Maiden Lane one Maiden Lane two and Maiden Lane three. So on the feds balance sheet you have Maiden Lane for a thousand and demand deposit at Morgan Of course Morgan's got this new thousand bucks. They need to lend it out. That's what they're going to do They don't want to sit there and do nothing with it and there's some guy named Rupert Murdoch who needs to borrow money right now and Not to be confused with Rupert Holmes Did a song called the Pina Colada song here the only guy in the room that will remember that, right? Okay, so anyway out of that thousand bucks They make a loan to Murdoch, which of course is an asset. They've got reserves of thousand their total is a 1900 their equity is the again that demand deposits some guy named Jones The Murdoch loan mr. Murdoch puts the money In his bank as a demand deposit. That's his 900. They total unbalance at 1900 of course Murdoch immediately immediately has lawyers to pay as we know and because he's been somebody in his company has been hacking into Hacking into phone calls and so he's got his play Pay money to his lawyers and of course they bank at Goldman Sachs So in bank a you've got a loan to Murdoch. You've got demand deposit Again for mr. Jones that their reserves now are a hundred Goldman Sachs now the barristers those are the loans that Are those who the lawyers for Murdoch? They've got 900 bucks over here reserves for 900 The Federal Reserve balance sheet looks like this again the maiden lane junk that we talked about before The demand deposits at the bank Morgan for a hundred Goldman Sachs at nine nine hundred Now then Goldman Sachs needs to make a loan to somebody else that really needs help right now And that's the state of California because they're broke. So they lend them $890 again, we were assuming a 10% reserve ratio So You can lend out if you get 1,000 in you can land out 900 if you get 900 in you land out eight eight ten and so on and so forth People ask me is that really the reserve ratio? It's the reserve ratio on demand deposits the reserve ratio on savings deposit zero But if you did this example on zero it would get out of hand really quickly So that's why we're using ten when Murray wrote his book the mystery of banking. He used 20% You didn't have near the multiplying that can take place that way Again Bank B Goldman Sachs loaned to California got reserves at 10. You're at 17 1710 you've got the barristers still got their demand deposits in there at 900 and of course the state of California has their Demand deposits at 810 so they balance at 1710 state of California needs to pay somebody who do they pay? their retirement system Cal PERS You know all those all those fire chiefs in California that are Retiring at $300,000 a year. They need to pay into that pension plan. So Bank B. You've got a loan to California They're at Goldman Sachs On one side ledger at 810 the reserves at 90 Demand deposit with the barristers Bank C is Cal PERS Bank they've got a deposit With Cal PERS and reserves at 810 so the three banks line up something like this You can kind of walk through that yourself J.P. Morgan's got the Murdoch loan and the reserve Totally not to the same as the demand deposit on the other side of the ledger Goldman Sachs has got the California loan at 810 and their reserve With the Fed the 990 or the demand deposit of 900 with the barristers Wells Fargo 810 and 810 the Fed has got their maiden lane junk offset by liabilities at Morgan Goldman Sachs Wells Fargo, you can see that the thousand The thousand over here plus 900 plus 810 plus 729 so on and so forth that Thousand bucks they put in the banking system eventually becomes $10,000 and that's how you multiply the deposits in this Supply of money through the banking system. They bought Thousand bucks and CDOs from J.P. Morgan Chase and eventually that becomes $10,000 in new money So then you go well Wow, how come we don't have Why don't we have a real inflationary mess right now You know because You can see where this car is located in Greenwich where most of The hedge funds are in California You will see a cayenne in the parking lot here at the Institute. It is not this car but Anyway, this is the feds balance sheet and that's a kind of a ghostly Ghostly Ben Bernanke there, but you can see Right here. This was the financial meltdown and This green in here was maiden lane actually They call it something else. You can't really read it real well But it was the they call it the bailout of Bear Stearns and AIG which is what maiden lane actually is these are treasuries down here But their balance sheet went from roughly I think eight nine hundred Billion to two point two point eight trillion now So you've had this huge huge increase in the feds balance sheet So based on what I just illustrated you would think the money supply is going crazy, right? just because That increase could be multiplied by ten times if banks were out loaning it out if they were out loaning it out to Rupert Mardock and Cowpers and so on and so forth But they're not What a banks doing This is a graph of excess reserves of deposit Depository institutions, so they used to keep Just almost nothing on reserve at the Fed until the financial crisis and now all that big expansion of the Of the Federal Reserve is stuck right here banks are not lending the money out And that's why you don't have this huge increase in the supply of money It's being shown very nicely with that graph If they were loaning it This There's my red dot. There is This graph would continue on way up here But you can see since the financial crisis Loans have come down Essentially now they're kind of flat, but they could come down even further most loans and depository institutions in the United States Real estate all of this all this run-up was real estate. It wasn't CNI loans one necessarily consumer loans anything like that real estate crank this up Getting a real estate loan right now very very difficult Now but we still got money supply going up. This is true money supply This is on our website M2 is the green line the true money supply that Has been developed. I think jointly. I think Murray was involved just learn. Oh, probably others But we've still got increase in supply of money, but again, it's not as great Possibly as it could be but if you got money going out Obviously, we got we got 44 million people that are on food stamps. You've got unemployment at 9.2% Nothing on Main Street's happening. So where's the money going? Well as all the money's been created over the years It ends up going into Speculation This is the from 1928 to 2011 Easy money money created out of nowhere money created out of banking system inevitably goes into Stocks Went into houses remember the housing boom You can see where it Yeah, the little boom here and a little boom in there and then a big big big big big big boom And then a crash and it is still Still crashing to this to this day. How about commercial real estate had a bunch of bunch of that money Is created in it up in commercial real estate? Every once while you'll read lately the commercial real estate is coming back It is not as you can tell from this as you can tell from this graph It is not coming back in any way shape or form. There are some trophy properties that are doing fairly well, but by and large Commercial real estate isn't doing very well. Where's another place? Probably the biggest bubble that is out there right now is government bonds Now I don't think I need to tell this crowd that the increase in supply of government debt has exploded, right? So even though it's exploded you can see the trend in yield and Yield of course is the opposite of price as yield goes down prices go up So you can see that the price of bonds has gone continually up since 1980 Despite a huge huge increase in supply and that's where a lot of hot money is gone Most of the buyers of this debt Certainly whoops during this period Oops The Fed is buying most of it here biggest buyer of government debt right in there Consumer price index Most people would say this is understated for sure if you follow John Williams at shadow stats comm he would say this falls far far behind right now the CPI is running at a three point six percent. He would say it's running more like nine ten eleven but you can see that Prices reflect that increase in the money supply that I showed you so in in conclusion Probably my second favorite slide that I have you will see tomorrow my favorite slide But this is what happens when government Has its way instead of money being hard work and It becomes some pettic as some economists pet theory that they think they can print prosperity They think they can print savings This is what ultimately happens to it toilet paper only to be used in this toilet I'm sure you I'm sure you have a 15 minute break and We will be back at four o'clock Did I really?