 Our guest this weekend is our own Dr. Joe Salerno and we are talking about monetary policy and gold on the heels of yet another GOP presidential Primary debate and it appears it not even ran Paul is going to be able to generate much interest in the Fed or in monetary policy Generally in the 2016 cycle now Ted Cruz has for his part at least eluded faintly to the idea of a gold standard For which he was promptly savaged by the media both left and right for even bringing it up But as Joe and I discuss a gold standard is hardly something it needs to be imposed on anyone It's something that can develop in the marketplace on its own and it can develop alongside competing currencies in other words Gold could be used as money in America alongside the US dollar We also talk about how the feds interest rate targeting and really the entirety of its open market operations only serve to obscure what's really going on with the most important metric which is the money supply and Finally, we talk about how to sell like Ron Paul did so successfully some form of anti-fed Populism to the general public so stay tuned for a great interview with Dr. Joe Salerno Dr. Joe Salerno welcome back once again to meet this weekend's last night We had yet another GOP primary debate and not much talk of the Fed or monetary policy Although I do notice that Ted Cruz has at least eluded to a gold standard in some of his public statements And of course he's been savaged for it Let me give you sort of a representative criticism This is from the New York Times a few months back And I'm quoting them tying the dollar to an arbitrary quantity of shiny metal Binds policymakers hands robbing them of their discretion to act the central bank can't adjust the money supply To counteract crises or prevent them So give us your thoughts on this kind of criticism which we hear so often with respect to the gold standard, right? They're very fearful of gold. There's a gold of oral phobia, which is the Greek word for fear of gold Out there and they the left exploits that In fact, well their premise the implicit premise of what you just read is that the money supply Should be manipulated by the political authorities In response to developments in the economy when in fact Money grew up as part of the economy and adjusts as any other good does like apples Automobiles McDonald's hamburgers the production supply and value are determined by the market and the same thing is true of money And should be true of money and also gold is it's good that gold is a golden handcuff I mean that is that it binds politicians whose propensity is always to increase spending and to do so in a way That does not raise taxes and that means printing money, right? Well the criticisms of gold of course aren't just on the left they come from the right as well But respond to this general Criticism that because the supply of gold can't just be increased it will that this suppresses Economic growth overall. Yeah, well the whole point is that if we step back just for a moment and look at economic growth Economic growth in history under the gold standard has occurred Via the the increase in the value of money that is a fall in prices now that doesn't bring about Deflate deflation does not bring about depression and unemployment. In fact Even mainstream economists today Realized that there's something called a good deflation and that's where you have technological improvement Increases in investments and capital goods that raise productivity of workers and therefore lower costs So prices fall step. Well, you know hand-in-hand with a fall in cost through competition And this is exactly what happened in the periods period of the greatest growth in US history from around 1879 through 1896 we had a fall of prices from two to three percent and one of the most Rapid increases in GDP growth in American history, you know Joe Rothbard makes the very important point that unlike other Commodities an increase in the amount of money in the economy doesn't confer any social benefit We don't have any new goods or services as a result. Why do you think this point is not discussed or under better understood? Well, because they're always thinking that that money is is really exogenous to the economy. It's not part of the economy It's a measuring rod and so measuring rod should be stabilized So prices fall we should increase the money supply so that we have a stable standard of value, okay? And that's of course false money's like any other good its value is determined by supply and demand It doesn't stand outside the market economy even fiat money has its value determined in the market economy Even though the government monopolizes supply or the central bank monopolizes supply Individuals demands interact with that supply to determine the value or which is the inverse of the price level We always hear this fear that Austrians in particular would want to impose some kind of gold standard on the economy when in fact We would just like to see gold operate as one kind of money available in Society and gold has evolved over millennia as a popular form of money. It doesn't need to be imposed on anybody right exactly it took you as you said millennia for for the human beings to hit upon something that is the Means of it or let's say medium of exchange that is least bad I mean gold is not perfect, but gold does combine those qualities in Good that you want for a medium of exchange Durability and so on you know the whole list. So gold When we say restoring the gold standard, we just mean restoring market money Restoring the power of the market to determine the value the quantity and even the composition of money We don't necessarily believe a gold standard is going to always be the money I mean we would be willing to I mean if the market chose silver that would be fine or some other commodity But why couldn't we have a world as Ron Paul suggested where we truly have competing currencies where governments continue to issue fiat currency Which is used where some sort of a gold-backed currency is used perhaps were a cyber currency like Bitcoin is used And just let the marketplace decide now. I agree with that. I think that's the first step back to a sound money We have to see what the market chooses what individuals choose and individual businesses and households decide to hold and use an exchange So yes, let's allow full competition Get rid of all taxes capital gains taxes sales taxes excites taxes on golden silver and Allow them to compete on an equal footing with not only the US dollar But but other foreign fiat currency, but let's have open competition now in 2012 Ron Paul managed to have success in making monetary policy a populist issue It seems that neither Rand Paul nor Bernie Sanders have had as much Success in bringing monetary policy into public debate if you were advising a presidential candidate How would you tell him to talk to the public about monetary policy? I would suggest that they point out that monetary policy is now being made by Unaccountable bureaucrats bureaucrats whose appropriations are not whose budgets are not determined by congressional appropriations Who have no oversight so I think the first step and it's a step that right and left can unite on is Is to reestablish constitutional money in the sense that Congress now oversees the Fed? I think the end of so-called independence of the Fed be taken away and that it be folded into the Treasury And then that's the first step back In a populist program back toward a gold standard. You would still have fiat money But now the Fed would not as part of the Treasury the money would simply be printed up to pay for Expenditures of government. There would not be this arcane process of money creation that goes through open market Operations goes through the credit markets and actually distorts interest rates This would the the if Congress controlled money, then there would be no distortion of interest rates They simply print up money when you know, we had deficit This was an old plan put forward by Milton Friedman and I I don't think it's it's The end goal and be all but it's only the very first step back in a populist program So it's not that you advocate some form of neo-greenbacker position per se But rather you see some incremental benefit to bringing transparency to money creation from this kind of system in the Treasury Yes increment. Yes, but Joe as you know not all the criticisms of gold and its role in the economy come from the left We also have people on the right and and libertarians who talk about things like NGDP targeting Which is currently in vogue, you know, what do you think is behind this? Do you think? Libertarians and some on the right view this as an incremental step or do you think they they really believe that? Inflation targeting or GDP targeting is the answer. Well, no, I don't I think it's more wonkish I think that the libertarian economists or the Austrian some Austrian economists so-called who support these sorts of Nonal GDP targets They are victim as much as as as the rest of the population to the very pervasive and effective Propaganda of the Fed that it should be independent. So given that we have fiat money So they're they're saying, okay, we have fiat money now the best That we can do is is to have the Fed Target some some, you know follow some rule Target GDP or what a nominal GDP or whatever it is whereas my view would be no the the first step is to is to get rid of the Independence of the Fed make the politicians who are directly Elected make them the ones that bear responsibility if we have inflation and I think they're you Moving in that direction. You'll it'll be an easier path back to the gold standard Since the crash the last crash of 2008 We've really been in an unprecedented time for monetary policy and people of the Fed will even freely admit this What do you think will be the ultimate harm of this quadrupling of the Fed's balance sheet in a period of just seven or eight years? Well, it depends if the economy picks up And and interest rates begin to rise interest rates on the market begin to rise Above what with the Fed's paying on excess on riskless excess reserves Then you'll have those reserves lent out now the interest the the money supply is increasing at six seven percent per year It's it's increasing substantially It's increased from eight to ten percent for a few years there after the financial crisis And now it's settled between six to eight percent per year since 2010 or so So that's a I mean some of that money some of the reserves are being transformed into money via fractional reserve banking And the problem is if indeed we have a Movement upward in the economy that the banks will then begin to loan out more of those reserves and and the rate of increase in the money Supply will be will be greater and then the Fed will have to begin to unwind its position has will have to reduce its balance sheet And it's going to have to sell some of the mortgage-backed securities Which still aren't very good and that may cause a market Plunge Joe do you think Janet Yellen is a true believer someone who always thinks that there's another round of QE Or interest rate lowering or do you think she understands on some level that there are limits to what the Fed can Yeah, I think Yellen is somewhat of a true believer. She's worried, but yet if you read her Which her statement after the last Fed meeting basically she believes in a very Crude type of Phillips curve I mean she doesn't think that the increase in the money supply is what causes inflation if you follow her reasoning and that In that press conference what she basically says is look the the labor market is strengthening But it's not isn't strong enough yet to to bring about inflation the inflation that we want 2% per year So she's got sort of a cost-pushed view of inflation that your lower interest rates You stimulate business investment you could get more workers hired and that puts an upward pressure on wages And then we get the inflation that we desire at 2% She doesn't see any sort of connection or at least student-state one between the increase in the money supply and and and an increase in prices directly so they've really Regressed in the last few years That is Fed officials and McRoy Conn is back towards the Phillips curve notion and I find that very troubling Well on a limited scale. We have a model in Japan. You might call it a cautionary tale They have been suppressing interest rates for decades and they've seen no real economic growth at all How do mainstream economists explain Japan would they simply say well US is different because we're the world's reserve currency Well, they'll be like Paul Krugman and say well, there's not enough of it Interest rates have to be lower. We have to have more QE and we have to have and of course they had big deficits which the u.s More or less talked them into and none of that has worked But but they would say well, it's just not enough. We don't have enough of the Keynesian medicine Injected into the victim not the patient the victim because eventually You know Japan is is going to go back into into sort of a I mean it's never really come out of It's it's great recession Joe about a month ago The financial press was just mesbrized by Janet Yellen's announcement that the Fed Would target a quarter percentage point increase in the Fed funds rate, you know, it all seems so complicated There seems like there's so much obfuscation. How should we? As lay people think about all this talk about the Fed funds rate. How does it affect us? Okay, it's not okay It it can be traded between banks, but it's not only created between banks I mean the banks can loan those those reserves out and they do loan the reserves out Okay, right now they're they're they're holding a great proportion of them Look the Fed funds market in which banks trade reserves between one another is a bogus market It's created by the Fed. What do they trade in a trading something that's really non-scarce That can be created by one stroke of a keyboard in cyberspace and they trade that between one another so in my view These boosts in in the interest rate that just one took just a card and four that is supposed to card in 2016 And that yesterday larry summers said, oh, I don't think we can stand Four increases of a quarter point each That it's bogus what what what's really important is look the effect on the money supply Okay, the Fed funds rate the movements in the Fed funds rate have no effect on the economy In fact, there's only 300 transactions per day in the Fed funds market totaling about Um, 50 50 billion dollars in one day $740 billion worth of bonds are traded in real markets. That's where the interest rate is set The Fed funds market has no effect on setting the interest rate or on inflation. Okay The open market operations that inject those reserves are only effective to the extent that those reserves are lent out And for various reasons including paying Um interest rates paying an interest rate for excess reserves. That is the Fed doing that That those reserves are being Um stopped from going getting injected into the market and multiplying Into an increase in the money supply. So so we're focusing on the wrong thing is my point But to go back to the Fed's balance sheet. I mean it is unimaginable under any kind of let's say gold standard system That the Fed would be able to quadruple its balance sheet over a period of about seven or eight years Do you think people really understand how unprecedented this is and what kind of environment the Fed is trying to operate in? It's completely unprecedented. Absolutely Under the gold standard we all the base money all the gold in the that has been Mind is still in existence except except for the that has been used in industrial uses or been lost at sea So the production of gold not only given years a very small proportion Of of the so-called monetary base. So inflation if there is any is extremely moderate and usually There is no inflation because the amount of goods and services in a Dynamic capitalist economy is increasing at a greater rate than the influx of of new gold Joe one last question for you today Apart from lay people in the general public do you think economists? Really understand how unprecedented our situation is and how dangerous What we fear could be an unraveling of the u.s. Dollar really is for the american economy No, I I don't think so and I think it's being obscured And it's being obscured through some of the language that is used And and the focus on on the fed funds rate rather than on the money supply This whole this this focus of you know raising the rates Okay, well look if there's no change in the money supply that has no effect on anything Raising the fed funds rate or lowering the fed funds rate It's the reserves that actually are lent out by banks that then bring about an increase in the money supply and potential inflation And at the same time of course distort interest rates because when the banks lend the money out The only way they can get additional borrowings is by lowering the real market interest rates And then that gives entrepreneurs the incorrect signals and then they begin to over invest in so-called capital goods And then we get a distortion in the real economy that needs to be liquidated later on via recession Well, I don't think we're going to get this kind of technical discussion In the remainder of the 2016 GOP presidential debates. Joe Salino. Thanks so much for your time ladies and gentlemen. Have a great weekend