 So what I'm going to focus on a lot of the material that's what we didn't coordinate this It's just that Jeff Carlson. I it's remarkable how much our talks are going to overlap But yet there's enough distinction that I think you'll see you know our themes are consistent But we're giving you slightly different information if you need This this power point you don't need it if you want this PowerPoint afterwards I'll just obviously ask me and we'll figure our way for you to get this because again I know people in the back might not be able to see this So what I'm going to go through here is the dot-com bubble the housing bubble and then future Crash question mark because what I want to show you is even though the stuff that we're telling you Obviously, there's a sampling bias here. That's sort of people in this room You guys are kind of weird is that a fair thing to say right? So your co-workers look at you a little bit oddly perhaps you maybe keep keep your opinions to yourself when you're out in about town So I realized that you know, we all think the same on these issues and that's why you're here and you're kind of probably hearing things They're consistent But what I want to show you is this way of looking at the world the stuff that Jeff and Carlos have talked about that I'm going to be going over this really did explain what happened for the last crash and that you know Austrians really were not shocked to see that whereas a lot of mainstream people were If you take nothing else away from this talk if you haven't ever seen it go to YouTube And we wait till I'm done talking but do it afterwards go to YouTube and look up Ben Bernanke was wrong Okay, and then make sure you get a good one There's like compilations of it you know get one that's got 50,000 plus views to make sure it's a good juicy one and you'll just see that Bernanke back from 2006 before he was even Fed chair when he was just like on a council of economic advisors in every step Of the way was wrong about what was coming like back then that he was on like CNBC and they're like no Ben they're saying that there's there's maybe a housing bubble What do you think and he was like well there might be some froth froth in the subprime sector But we don't think you know and it'd be a lot of froth didn't it and and then every step of the way then the next His next thing I think he was in front of Congress and they were saying you know Do you think there's gonna be a recession and he and this was like in early 2007 and he goes oh no no It's there there might be you know the housing sector is in trouble We don't think it'll spill over into the broader real economy then the next time the clip shows him saying oh Yeah, there's definitely going to be a recession, but we don't think it'll be too bad And it was just all along the way that he was wrong. Okay, and again remember he got reappointed too, right? So it just showing you that you know Washington DC is not a meritocracy and so it's not merely that we're Contrarians here and also it's it's not just that we're always, you know doom and gloomers that I will tell you when I get to there's one slide in here out of my whole power point That's actually optimistic just to give you a sense of the ratios Okay, there's a lot of pessimistic slides just to warn you, okay But what I want to show you is that the Austrian approach Explained that to kind of give you confidence that you know this this stuff. We're relying on here. This really did come to fruition last time around Okay, so first let me just again go through the theory pretty quickly and then give you some of the facts So what causes the business cycle the speakers today? We all subscribe to the theory that was developed by Ludwig von Mises First in his book the theory of money and credit and then throughout his career He elaborated upon it and then you know one of his leading followers Friedrich Hayek who actually won the Nobel Prize in 74 Largely for his work developing what we could call the Mises Hayek theory of the business cycle So the a quick introduction I'm sure a lot of people in this room You know some of you are experts in this but some of you may have never heard someone just stop and spell it out So let me just give you the big picture of this the way to understand the Austrian theory is sustainable versus unsustainable growth and So if there's genuine savings then that fuels sustainable growth, right? That's it's not an Aberration for living standards to rise over time. That's normal in a market economy Because as Jeff was stressing in his remarks people live below their means right they have an income They save some of it that accumulates capital equipment So part of the way to understand that is yes, there's technological discoveries We know how to do more stuff now than people a hundred years ago did but also our workers have more tools and equipment to work with Okay, so that's partly why our standard of living is higher is because previous generations were saving and accumulating capital all along So there's nothing weird about a rising stock market over a long-term period If that's you know that that could be a barometer of the genuine health of an economy There's no reason if output keeps rising it doesn't need to collapse suddenly and One of the things that helps coordinate that are interest rates So interest rates as Jeff was stressing in his stock are market prices and they coordinate what consumers are doing And what firms are doing and the crucial thing about an interest rate is it has to do with time Okay, now for our remarks today, obviously, I got to be brief on this and sort of giving you the intuition But the idea like if you're a business person You know that the interest rate like if you have a long-term project and you're trying to decide should I pull the trigger on this project Or not, you know It involves a lot of upfront costs and then you have projections about the revenue It might bring in down the road to say is this a good idea or not? What do you need to know? You need to know what's the discount rate that I'm using on this cash flow projection You need to turn future dollars into present dollars to put them on an apples to apples basis to see over the next ten years Is this thing profitable or not? You need to know what's the relationship between future dollars and present dollars. That's what interest rates give you Okay, so that's a crucial Price in the market to help coordinate things over time so it's consistent So the economy doesn't grow too fast then sputter out or you know The amount people want to save and defer to the future. How do entrepreneurs know that? How do they know they should invest in long-term projects because people are willing to wait for it? Well, that's what interest rates do. That's the job. They do in a market economy if they're the correct price So what happens now if the commercial banks and modern times aided and abetted by central banks? If they flood the loan market with unbacked credit that artificially low rates that screws everything up Right, it's the wrong price now So it's like the interest rate if it's artificially low is giving a signal to entrepreneurs Saying go ahead and invest in long-term projects because people have saved more But what if people really didn't save more? What if the reason interest rates are down is not because everybody is being real frugal? But instead because the Fed decided to buy a bunch of treasuries and mortgage-backed securities and it created money Electronically out of thin air to do it. Well, then you can see how there's going to be a disjoint in the economy entrepreneurs are going to be investing starting long-term projects because the interest rate signals giving them a green light But yet people haven't saved more on the contrary if it's a boom people are saving less and Interest rates are down so they don't want to save on that account and they feel rich because it's a boom period So you can see how the different pockets or segments of the economy are doing incompatible things It would make sense. It's fine to invest in longer-term projects If people are willing to defer consumption for a few years until those new goods come out of the pipeline That's all consistent, you know over time that that meshes those plans are compatible What doesn't work is if everybody? Like in terms of wage earners and so on if they want to consume more they want to big buy big fancy houses They want to go out to the movies more and so on buy a sports car While the entrepreneurs are thinking oh we can invest in longer-term projects because there's more capital available Those two things can't be true at the same time and yet that's what happens during an unsustainable boom period Okay, and so again the the cheap bank credit and low interest rates They cause an unsustainable boom which inevitably leads to a crash So I think jeff stressed this in his remarks in the austrian framework It's sort of flipped from the conventional narrative in the austrian framework the boom When everybody feels great and the unemployment rates real low everyone's getting you know You can quit your job go get a better job somewhere else things are good business earnings are high The austrians look at that and they're worried and they say this is this is artificial Okay, whereas that's the thing that most mainstream economists when they give policy advice They're trying to go back to that the austrians are saying that's where the seeds were sown For the crisis that's coming and so then when the crisis hits the austrians are like well Yeah, what do you think was going to happen? This needs to happen this cleansing period It's painful, but we got to rearrange resources and get them back on a sustainable trajectory So the recession period is actually healthy in a perverse sense from the austrian framework And policymakers to use that euphemism They should just keep their hands off and let it do what it needs to do Okay, so this general framework i've given you let me just point out that Economists who are relying on the sort of thing that i'm talking about they predicted the housing crash years in advance There's lots of quotes There's some great stuff like that ron paul was doing from the congressional floor in the early 2000s But let me just give you one quotation So i'll read it first then i'll tell you who it was So he says higher interest rates should trigger a reversal in the housing market and expose the fallacies of the new paradigm This exposure will hurt homeowners and the larger problem could hit the american taxpayer Who could be forced to bail out the banks and government sponsored mortgage guaranters Okay, so that is clearly what did happen in fact going into the housing crisis That was economist mark Thornton, you know on staff down in auburn alabama. He was at the works for the mesas institute And he said that back in june of 2004 Okay, so it's eerie when you see how accurately he nailed that and again It's you know Thornton relying on standard austrian business psychotherapy to uh to make these sorts of uh commentary about the At that time everybody was real excited about the great housing boom Okay, so now Let's let me just show you some some data and again for people in the back You're not going to be able to fully make this out But uh, I just want to show this isn't just words up here and the fact that you know, oh, we don't like the federal reserve Or I mean to be clear we don't like the federal reserve, but it's not merely our distaste I want to show you that the numbers actually fit this stuff like you can go and and point to charts And and and tell the story and talk about turning points and what I have you so this is the federal funds rate This is the one that you know, carlsson and jeff are both talking about so I'll tell you the timeline. So down here. This is 1998 1999 2000 And then this is the recession remember there was the terrorist attacks and then the dot com crash So this was the recession in the early 2000s george w bush was in office And you can see the federal funds rate was at six and a half percent And then they brought it all the way down to one percent by june of 2003 held it there for a year And then in june 2004 they started hiking every time the fed met They would you know raise raise a 25 or 50 basis points Okay, so the same playbook that they're doing now. It was just not as severe back then that up the dot com crash Terrorist attacks the economies on the ropes. What do you do? Keynesian textbook move you cut interest rates That's how you stimulate from the monetary side and they were calling green span He was the chair at the time remember they were calling him the maestro They were very happy at how he engineered a takeoff and housing prices Even admits what should have been on paper at least a bad recession So people don't call him maestro too much anymore okay, so Now Taking a further step back here a broader picture you can see so this blue line is still the what was happened with interest rates This red line I put on top is the case schiller Home price index and so you can see that when the you know, they cut interest rates And then started raising them and so you see this red line really zooms up in the mid 2000s That's when the housing bubble really was accelerating and then it turned and started crashing after they had fully raised interest rates back up to their new plateau Okay, so again You know the timeline fits that general narrative I was giving you that the fed the dot com crashed the fed eased by cutting rates that started blowing up the housing bubble You know prices started rising the consumer prices the stuff doesn't the fed it kind of gets worried about our god We can't keep interest rates down at 1% that would be crazy So they started raising and then once they were full, you know, finished with that normalization cycle That's when home prices turned around and then started crashing hard And then of course what they do well They started cutting again because that's what you do when the economy is bad you cut interest rates when the economy is Healthy you start raising rates. That's the standard Keynesian move Okay, so as you well know, Bernanke did the same thing Qualitatively but quantitatively he did much worse Okay, so here is a long-term view of interest rates. Again, we didn't plan this This is we all decided to use the same boring charts with you guys But this is the federal funds rate. You can see this is 1960 Up to the present. So I did this long view And I think that's probably why Jeff was showing it also Just to show you this is not we're not like just cherry picking and looking at the last 15 years or something Over the long term you can see how ridiculously low interest rates have been this is not normal And so over this whole post war era You can see interest rates how high they were and then this right here Is what green span did that we're going to say had something to do with the housing bubble and now you can see what Bernanke did. So what I want to point out is 1% is higher than zero But also look at the the length of time that it was down at 1% For green span for literally just 12 months Whereas with Bernanke and then going into yelling when they started raising That period of 0% effectively interest rates that was for seven full years Okay, so it wasn't just that the interest rates were lower, but they kept them at that low level for seven years So the point being if I if you bought the story a little bit And you think yeah, what green span did after the dot-com crash probably had something to do with at least How big the housing bubble got to be Then you can see why this should be alarming The problem with this though is this understates how much more Bernanke did because once interest rates get down to zero It's hard to push them lower than that because people would just go to currency So a better thing is to look at the stuff that like jeff was showing you with the you know the big monetary base So here i've got the blue line So the title of this slide is stock market tied to the fed from 2009 to 2016 Because a lot of people were like oh you naysayers you're complaining about several We you know once the economy bottomed out and we got our recovery Then look at how the stock market's booming and i'm glad I didn't listen to people like you Okay, and that's that's fine if you're timing it right, but I just want to show people So if you chart from 2009 to january of 2017, so I didn't like have to fiddle with this This is just what the st. Louis feds website generated by me picking these two series The blue line is the feds Sorry, the blue line is the s and p 500 and the red line is the st. Louis monetary base So that's the the thing jeff was showing you so you could see This was qe1 then they stopped on qe2 they stopped on qe3 Okay, so the red line showing how the fed and spurts Kept buying assets then would back off then buy assets back off and so on and you can see how tightly The stock market index moved You know with that thing if you pick the appropriate scaling on the vertical axes Okay, and so it's and if you remember for those of you who are really in the financial markets This this relationship Like that's partly why when the fed decided to launch another round of qe and they would point to you know softness in the economy One of the things they looked at was the stock market Okay, so it's partly you know in other words the red line starting to move up was partly because they were seeing stock prices Were faltering and so they thought all the economy needs more stimulus. Let's start buying some more bonds All right, so you can see how tightly those were together So just in general think of all the bad things economically the obama administration was doing and you know and this isn't political This is just you know standard economic stuff if you think markets generally work, you know, they are running trillion dollar deficits I think four years in a row They uh massive takeover of the health care and health insurance sectors Talking about you know raising the minimum wage several times some of that was signed, you know by george w bush But you know that that did happen in these years Threatening people with a big intervention into the energy sector, you know with a cap and trade and carbon didn't go through But you know threatening having all kinds of regulations on emissions and so forth So there were a lot of things They were doing that you would expect to have hurt the economy To see the stock market booming like that and then to see how it goes hand in glove With the fed just creating money and buying government debt and mortgage backed securities Should make you think that that stock market Correlation there is not because investors realize how great the future was Now let me mention. I I didn't continue it because after trump's election the stock market did rise Some and so this they would you know if you kept this going then the stock market would seem to have gone above With the because the fed was not buying bonds after trump got elected. Okay, and so When I say that the trump card here I will um Say that the stock market rise since his election I have no problem saying that's due to like fundamental legitimate factors Again, not being political but just in terms of the stuff he was saying he was going to do like after the initial scare And people were like, oh, yeah, he maybe you know He's going to do all these things that he said he was going to do like deregulate and so Tax cuts, what have you it would make sense for you know Given what stocks were on the eve of the election and they thought there was going to be a hillary clinton administration Then he comes in once people got over the shock of that It makes sense to me that stock prices would go up that they would revise their forecast of profitability and so on So that that's fine But i'm saying clearly even before the election in my mind that the stock market had been pushed way up By what the fed had been doing Okay, so this is maybe a way of seeing it. We're now tightening after a prolonged period of easy money So again, I believe me. I understand especially carlsson I have been going around for those of you in natural you've you've heard this story And you might say well you guys were complaining about this five years ago Well when they're doing an awful policy for seven years that shows our consistency, right? We were talking about it all along so If you think about it the austrian story is they pump money and cheat money pushes down interest rates And that gives a false boom and then they start hiking and then they pull credit out and that's when the crash happens Okay, so they really have just recently started tightening and so You know if there's a big crash that happens as they continue to tighten that's just that would be standard You know looking back that's standard austrian theory It's the reason it seems like wow What we're just perma bears is because they had this crazy policy in place for so long But they are tightening at this point So now that i've complained so much about Monetary policy. Let me just say a few words here Uh about fiscal policy So it is true that the um The tax cut clearly it was not designed the way you know in other words that they had told me This is how much revenue you're allowed to spend or forfeit in terms of a static analysis And go ahead and do something that you think is economically good, but also we can sell to the public I would not have Done the particular package they did i mean carls has some great research He did the lara murphy report on this like it really was like Paul krubin's caricature of republicans giving handouts to the wealthy and so on with Surprisingly little you know crumbs thrown to the working class But still the government taking less of people's money that's i'm always on board that so i've given that it happened i'm glad it did Uh, but it is true that you know once you you build on all the assumptions is standard scorekeeping It is amazing how much the federal debt's going to explode According to even conservative estimates So even if people aren't factoring in that there's going to be a crash Right if they assume the economy is just going to gradually keep growing and things are going to go back to normal The the numbers so there's no way that people in the back are going to see this But the congressional budget office came out with a recent thing they're saying Starting in fiscal year 2020 so the federal budget fiscal year starts in on october 1st That you're going to have a trillion dollar deficits forever Okay for the next you know as far as the eye can see the deficit just structurally in there You know the way it's built in with the mismatch of revenues to spending That the deficit is going to be a trillion dollars plus and that's there's no that there's no reason for that to fix Itself with current policy. Okay, so this isn't like you know under the obama years they could say Well, we're in the midst of what was going to be the worst crisis since the great depression No kidding. We had trillion dollar deficits, but then it sank down once the economy, you know recovered They don't have that excuse here. This is a normal economy. They're forecasting and yet they're saying Yeah, we're on the numbers here. It's we're going to have trillion dollar deficits perpetually and the federal debt Held by the public So my figure is lower than the ones what jeff and carls were showing you was the total outstanding stuff counting like the social security trust fund You net all that stuff out just what the outside world Is holding in treasuries that's projected to hit 29 trillion by the year 2028 Okay, which is only a decade away at this point. All right, so again, you could just see the the corner. They've painted themselves into Even people who don't understand austrian business cycle theory. Just look at these numbers are wondering What's the exit strategy here because as jeff was stressing they're kind of between a rock and a hard place Is as regular prices start rising, you know the the unemployment right now is very low by the official measures So they can't continue to have these artificially low interest rates because all the economy's so weak Like they've run out of that excuse. They kind of have to start letting interest rates rise But yet with this much debt that they've added and are going to continue adding That the interest rates are going to be huge. So it's sort of like The debt they ran up during the obama years Didn't feel as painful because at the same time the fed pushed interest rates down to zero Okay, so it's you know like if you're Getting credit card offers and you can keep rolling over your balances at zero percent APR for you know, six month 12 month Promotional periods you can go run off the credit card bill and it doesn't feel painful You get a lot of good stuff and it doesn't feel painful But then once those introductory offers run out and you start getting you know regular interest rates hitting you Then all of a sudden the full Amount of your profligacy comes home and you realize just how much you overspent So I think that's the the situation we're in And so you know you can see that they can try to keep interest rates low But that's just going to make the reckoning that much worse You know as the economy overheats the way kainzine would talk about and yet once they start letting interest rates rise You're going to have that Not only a crash from the Austrian point of view, but even putting that aside Just the interest rates on this debt are going to be Just it's not going to work They're going to have to either just cut a bunch of everything else just to pay interest Or like Jeff says come up with some way to give people a haircut And they'll probably come up with euphemisms and the way to do it So it's not construed as an explicit default because after all the u.s. Treasury, you know is the safest investment on planet earth They're not going to want to give that up, but they're they're running out of options and uh I know it's it's it's real easy like I've refrained from making cracks about donald trump just because it's so lazy at this Point like that's what every person does on twitter But it certainly does not seem like he's laying awake at night worrying about the cbo report about the debt in 2028 I'll just put it that way that does not seem to be something that's keeping up at night And then he's coming up with long-term strategies It seems like people are thinking one week ahead with the policies they're putting into place And we've gotten to the point where you know these things it used to be I remember what you know, I'm not that old But I remember when I was younger people talk about the entitlement crisis and and everything was always 30 40 years in the future when bad stuff was going to kick in Unless we turn it around now at this point It's like no starting two years from now the death's going the deficit is going to be a trillion dollars plus going forward unless we start making changes So that's that's the window now that we're dealing with Uh, and none of the changes is going to be good. So I hope you enjoy your lunch. Thanks everybody