 Ladies and gentlemen, it's my great pleasure to talk to you this morning. Oh, it doesn't work. Yeah, it does not. I'm on. Now it works. Okay, because here I don't have the loudspeakers. It's my great pleasure to address this distinguished audience this morning. I've been roused, especially by the introductory comments of our president this year, who said that all members without sufficient knowledge of economics would be expelled. Good prospects. So this morning we had the first step of economic enlightenment. We'll continue a little bit on the same vein with monetary topics. So we learned something about continuum effects in verbal, graphical, and arithmetic algebraic form. And we will have more about Nobel Prize winners later this afternoon. So today we have, this is my talk, we have the mirage of cheap credit. Of course, we'll start with the definition. So credit is a definitive or temporally transfer of an economic word in exchange for a future payment agreed upon in advance. Agreed upon in advance is important because this is what distinguishes a credit from an investment of your equity capital. If you buy an economic resource in exchange, as you hope for a future payment, only that this future payment is uncertain. So at your own risk. The main forms of credit are loans, commercial credit, mortgage, rent, lease, etc. So it's a phenomenon that is very well known. Before we can talk about cheap credit, the definition of credit, we should maybe consider some of the main problems that are discussed and that are practical problems also in this field. First of all, as we know, our present day credit is considered to be a panacea. As soon as there's any problem, that appears it's often a lack of sufficient funds, always a lack of funding, and especially as now in the context of government finance, governments have been called to address the crisis, among other things. We need to bail out companies, and of course we need a lot of money to do this. So where does this money come from? You could raise it in the form of taxes. That's unpopular, so we need to raise more money in the form of credit. Credit helps everywhere. Is credit an economic panacea? What are the limitations of credit? The only limitation that is often considered is the monetary limitation. Credit has monetary chains, very famously in the 1920s, Schumpeter said, we'll talk about Schumpeter later, Schumpeter said that there are golden chains on the credit machine. We could promote growth ever so much more if only we didn't have gold as a base money. Now today we don't have gold as a base money, we still have money, some money, and credit, if we are extending credit only on the base of the existing money supply, is limited. So we can grant much more credit if we create simply more money, and this is precisely the heart of cheap credit, credit coming spring if you're in money production. So cheap money, money that is created out of thin air, which gives then cheap credit. So clearly then, from an Austrian point of view, we need to distinguish between good credits and bad credits, and this is the subject of my talk to explain a little bit the difference. What are good credits? What are bad credits? Good credits are essentially those that are coming out of savings. Bad credits are those that are springing out of artificial money production. In contemporary economics, it is of a non-Austrian brand, we wouldn't find any of this, it doesn't give us any clue. First of all, the empirical evidence already is inconclusive. Essentially, contemporary economics tries to find developer models, there's no in-depth analysis of phenomena, a quick model of algebraic form, very often then you try to verify this model with the help of the data. And in the data actually, this is something that is very interesting, we don't find any strong confirmation of the connection between credit and growth. There's even not a very strong connection between the growth of financial markets and growth. Of course, there's a correlation, but as far as causality is concerned, there's no strong evidence. It's an amazing fact. And so what we know is that financial markets grow, and even tend to grow over proportionally, and the rest of the economy grows. But we don't see any causal connection, we don't know whether it's more useful to have a bank-based financial system or a market-based financial system. And so we have an empirical record that is by and large inconclusive. And as I will argue, one of the reasons why we have this inconclusiveness, which is surprising, is that we don't make the right distinctions. All the econometric work that is currently being conducted is based on aggregate variables, which have volume of credit, volume of bank loans, we have balance sheet volumes and so on. We try to correlate this with economic growth. So we have aggregate categories that are fit for quantitative work, but which are not really irrelevant from an Austrian point of view. What we need is a distinction between good credits and bad credits. But the distinctions that we do make, what we do find in contemporary economics, are more commercial rather than economic distinctions. So we have different types of credits, different types of financial instruments. But that's not really what we are after from an Austrian point of view. One example would be bank credit. So we have this large category bank credit. But bank credit can be given on the basis of a pure, in the form of a pure financial intermediation. In this case, the bank lands out money that it has received from other people. But bank credit, the same bank credit, can also be granted on the basis of money creation, which is completely different. So in the statistics, we have this one category. We don't have the distinction that is interesting or seems to be important from an Austrian point of view. So if we had this, this would be an initial industry question which we will answer in the future maybe, if we had such a statistics, probably they would show the results that we expect from an Austrian point of view. So in the light of contemporary knowledge, we cannot make the distinction between good finance and bad finance. So we have all the bad guys are protected under the shield of ignorance. We have all the good guys thrown into one bath shop with the bad guys and so silently suffering like Scrooge. So what we'll do now is to run very quickly through credit in the history of economic thought, and I will stay there only for five minutes or so, and then turn to three crucial questions. The first one is why can credit be productive in the first place? Why can it ever be productive? So what are the theoretical reasons that lead us to believe that credit can be productive? And then we'll answer the question when actually is credit be productive? The first one is when can it be productive? On which circumstances can it be productive? And when is it, does it tend to be productive? And then finally we get to fiat credit, which is the cheap credit that we are mostly interested in. Okay, so credit in the history of economic thought, we have three main phases. The first one is we have bad old times. Cheap ideas about money and credit have been old, and it has been one of the most widespread ideas. I mean, you always need to consider that popular thought about money and banking issues is known only as from the 1500s approximately, simply because we didn't have printing press before. And so, I mean, certainly these ideas are much, much older, but as from the 1500s, right, we found these traces that, I mean, the economy is not running well, or the business is sluggish because there's not enough money around. And we need to, can repair this if we had more money around, more money could be created through banks. And these cheap ideas were popular. They were fundamental, more land support to cheap money schemes, creation of fractional reserve banks, starting in particular in the 17th century that produced cheap money. And as we've learned from Olivier Rochard this morning, so cheap money for some, the first circle people, the second circle, the third circle people, and huge bills to pay for others, because there's an expropriation scheme going on. The first users are benefited at the expense of later users. And of course, as we also know, and as we'll explain a little bit later, such schemes lead invariably to crises. So there are bills to pay in one form or another by others. The most famous cheap idea producer was John Law. John Law is actually a mixed case. John Law was a Scottish financial promoter. This is his portrait here, one of his portraits. Olivier Rochard mentioned him too, so he's a great antagonist of Rochard Cantillon in the early 1700s. And also the author of one of the first treatises on money, in which he explained that economic growth could be produced by simply producing more money. Cheap money was used in the financing of colonial adventures, so the Mississippi bubble, John Law's responsibility, but also in the U.S., themselves the British colonies, they used cheap money, they used paper money, all throughout the 18th century, and cheap money invariably led in one form or another to revolutions. It financed the American Revolution and it financed also the wars of the French revolutionaries against the rest of Europe. Then came phase two, the revolution. In this case, the revolution, in the old sense, it's a return to bring ideas and practice into conformity with the real world. We have here sound ideas or at least sound ideas than before. Sound money for everybody. The most striking case is the American Revolution, which cut the history of American monetary history in two before we had paper money regimes and the American Revolution brings commodity money and ends paper money experiences. So with sound money for all, we have relatively small bills to pay also at all. One of the most important theoreticians here, as far as credit and capital, the role of capital is concerned, are Thurgo, Adam Smith, Ricardo, this is the picture here from Ricardo, and Ricardo especially through his monetary writings was the most sophisticated classical economist and also had a major impact on the bullion report which denounced the money creation by the Bank of England in prices in the first decade of the 19th century. You see here that I put Adam Smith one, because Adam Smith, as far as money is concerned, has two faces, the good Adam Smith is this one, Adam Smith one, and there's the bad Adam Smith. The good Adam Smith says that money has nothing to do with economic growth at all. The real causes of economic growth are capital accumulation and the division of labor, then of course technological change that goes into that. The money has nothing to do with this. Economy can grow at whatever price level, whatever spending level, and then there's Adam Smith two with the Adam Smith of the real-build stock trend. So according to Adam Smith, it's kind of okay and even beneficial if you extend the money supply in such a way as to grant credit only for goods that are ready to be sold so these are the so-called real-builds. So we get then to phase three, the counter-revolution. We have cheap ideas again. Ideas never die, just have different protagonists. Here we have Silvio Gesel, this is his portrait. He's a German-Argentinian businessman and financial promoter, so his idea was again, right, to growth requires more money and we need to inside people to spend the money rather than hoard it, so we need to have something as he calls a Schwunkel, money of a shrinking value substance, money that should be taxed at a regular rate so that people have an incentive to spend it rather than pay the tax later on. Adam Smith two is part of this, the so-called banking school which develops the ideas of Adam Smith further and most notably another Scottish theorist, even though Scotland was a rather poor country, maybe one of the reasons why they were fantasizing about the omnipotence of money and creating more wealth, so another Scott McLeod was the most influential banking theorist of his time and whose idea holds sway still over the present day. So we achieve ideas again, achieve money again for some and use those to pay for others. Phase four then we have consolidation, a consolidation of the counter-revolution which is our day and there's one interesting aspect of this consolidation in me that it's rather technical in nature so ideas are pushed in the background, nobody talks about Cantillon effects anymore so they're endless streams of money and a great but hidden robbery in the earth especially through central banks. So let's turn then to the first central question why can credit be productive? The first thing to keep in mind is that credit is always a transfer of resources. Credit does not create resources. Even if credit is granted out of nothing so money creation is just a transfer of a resource from one end of the economy to another. Creation in this case of purchasing power which permits some people to buy resources but you can buy only what is already there. So credit always is transferred, it doesn't create resources. So the question is do we have here a zero sum game which apparently it is or are there reasons for which this could be a positive sum game or are there other reasons for which there are negatives? It is a negative sum game. So the aggregate impact is superior or negative and what I will argue is that in the case of sound credit credit coming out of savings credit can be a positive sum game for various reasons and in the case of fiat credit, cheap credit, it tends to be a negative sum game. So classical explanations, this is to a goal. Classical explanations why credit can be productive. It transfers resources to more competent agents. It allows for the realization of larger projects that would have been impossible to realize with the capital or the savings available to any individual capitalist. It allows for a division of labor in particular between savers and investors. So it allows for a division of labor between capital rich savers but who are not particularly savvy investors. Good specialists leading a frugal life, the French peasant, and then you have investors who are not particularly good at leading a frugal life but who are good investors. So there is a possible division of labor between these two species and we have here the case of absolute advantages as in the theory of division of labor in general and the case of comparative advantages. Such a division of labor is possible even if you have one guy who is a saver and the other guy is to whom he lends money but he has so much money that he cannot invest it all on his own. He just doesn't have the time resources to monitor all his investments so he lends to other people. And we have a division of capital which is already an Austrian contribution by Ludwig von Lachmann for the same reason as the division of labor creates aggregate benefits, the division of capital, different use of savings which create different capital goods, creates an aggregate positive impact. In contemporary economics we have two distinct strengths of additional explanation which is not something that abrogates classical economics but that adds on to it. The first one stresses the stabilization of consumption through time. So credit allows us to smooth out our consumption through time so it's not necessary that we shuffle the structure of production in our own lifestyle depending on the fluctuation of our revenue but we can smooth it out on time and therefore obtain some gains. Most notably in contemporary economics we have huge emphasis on agency theory so it's a distinction between the principal and an agent. The principal would be the saver, and then the principal has agents which can be agents to Kuhl or can be financial agents. A non-financial agent would for example be the management of a corporation so we have CEOs and so on which are employees which are not capitalists themselves but agents of the property owners of the company but are not financial agents. On the other hand we have financial agents which are banks, insurance companies investment funds and so on which are intermediaries between the principal so the savers and the final users of these savings or the companies that invest them in industrial production for example. So we have here a division of financial labor which concerns most notably product innovation. We have specialists creating financial products. Just a short list of the main fields where we have such product innovation the creation of risk and the return packages so portfolio creation then the portfolio management maturity transformation so for example borrowing short lending long or the other way around which is a little bit less frequent borrow long and then short conceivable and then risk transformation not only in the case of securitization I mean this is all financial so I won't go into details so there is product innovation that's what we need to keep in mind. Then we have risk management and monitoring so you have companies managing risk which also occurs in the context of portfolio management and we have the monitoring of investments on behalf of the clients of the principals if you give for example your money to you invest your pension funds into a pension fund company then the pension fund management monitors the companies to which it has lend money and sometimes things turn out good and sometimes not so good like here this is on the Dubai stock exchange also he's monitoring his investments and it turns out to be not so good there's one case that is particularly interesting that is commercial credit because commercial credit is a borderline case very close to so there is money creation involved here but so we need to distinguish between a good variant and a bad variant so commercial credit most notably exists in the form of advanced payments you expect a delivery from a company your own company needs a delivery of some machine or some tool or whatever and you pay in advance pay some of money in advance and you obtain an IOU so a slip of paper that says well IOU delivery of these and that goods so in this case why do we make an advanced payment because as a rule this is cheaper than to make the payment later and we can use the bills of exchange that we buy in this way for purchases so we have additional liquidity if the issuer of this bill of exchange has a good reputation so this is a sort of credit money so we need less cash balances and can therefore invest more capital out of our capital not in cash balances but in other things and therefore we obtain a higher return on investment the same thing works in the other direction if we have an advanced delivery we deliver in advance we expect we are not paid right now on the spot but we obtain a promise for payment in three months or so which is typical practice so here we have a higher revenue because we could have sold our commodity of course too we could have delivered an insisted on immediate payment only then we would have obtained a lower price so we have a higher revenue and we can again use the bills of exchange for purchases we have again credit money creation the same thing so a higher return on investment now the crucial question is do we have here just individual or aggregate benefits clearly mean that individual benefits the companies practicing these things are benefiting from it how does the same thing look like from an aggregate point of view clearly the fact that credit money is being created is irrelevant from an aggregate point of view as a consequence of the credit money creation the price level tends to be higher spending streams tend to be higher monetary revenues tend to be higher but that is as Adam Smith has explained irrelevant as the Austrian has confirmed irrelevant from an aggregate point of view moreover we have so here additional investments the benefiting company can invest more but they are crowding out other resources so this is not an aggregate benefit either but we do find an aggregate benefit because we have here compliance mechanism that is you can benefit from commercial credit only if you have a good reputation otherwise people would always insist that you pay right now so commercial credit creates benefits for people who have good morals who are good at keeping contracts commercial credit and the credit money that it creates is a reliability premium which diminishes agency problems and therefore creates some aggregate benefit and this then gives us a possible feedback mechanism in which credit can this was a summary can for various reasons create a better use of resources this is the essential mechanism credit is always a transfer of resources it doesn't create resources but it can improve things from an aggregate point of view because it can facilitate a better use of the existing resources and to this extent then we obtain a higher return on investment in business and we obtain higher real incomes because the use of the available resources is better so more products are being created and if there are higher real incomes then there can be more savings and more savings can therefore facilitate more credit and so on that's a real loop now the question is when so these are various questions why credit can be productive from an aggregate point of view when is it productive in order to understand this we need to first consider the limits of credit first of all there is time preference which determines how much money people save and how much money they spend immediately for consumer goods so this is the limitation for credit credit necessarily comes out of savings in the scenario that we are considering now and so time preference provides an upper limit the quality of entrepreneurial judgment do we actually at the first scenario transfer to more competent agents are they more competent that's a big question we think, we hope, but we don't know and then there are risks market risks, political risks if risks increase interest rates tend to increase the premium in the interest rates or credits diminish it's a limitation on credit and then of course agency problems can we trust the people to whom we transfer our money and then finally which is related to agency problems the preference for independence we sometimes we just don't want to have credit we want to operate with our own money we don't want to be dependent on bankers we don't want to be our own man like Scrooge this is a French Scrooge, he says come in not waiting for his banker but for some people who want to lend money from him ok so when is credit productive the Austrian explanation has been given, the essential explanation has been given by Ludwig von Mises who argued that credit is productive when it is granted it is a competitive process Mises discussed this in the context of his discussion of cheap credit he said why would we need money creation to provide additional credits if the investment that we want to finance with this cheap credit is really more important that is more profitable than the other investments that need the same resources well then the investor simply pay higher interest rates so he could bid available savings away from the other people there would be no need to facilitate this investment by money creation so in the economy we have always in the best of all cases in the market economy all available resources would be affected to the investments that earn the highest return because the highest return is validated by consumer expenditure so the higher return the more the products are being valued by consumers so we wish that all resources are being affected to the employments that obtain the highest return in such a quantity it is never difficult to obtain credit if your investment project is more important from the point of view of consumers than the other investment projects then you can pay higher interest rates because you earn more so you can always obtain credit it is only if your investment project is more important than the other projects that you need a subsidy coming in the form of cheap credit but then clearly you are benefitting at the expense of all others who could have used the same resources that you are buying this argument clearly is based on the definition of property rights competitive bidding presupposes property and property must be legitimate from appropriate appropriation mechanisms which brings us from Jesus to somebody we know and who addressed the mechanisms of moral appropriation in a self-ownership home-setting production gifts and exchange now we come to fiat credit fiat credit is a temporary transfer of money created through violations of property rights in exchange for a future payment so the crucial thing is of course the violations of property rights the main forms are bank loans out of fiduciary media and all central bank issues here we have the multi trillion dollar question does fiat credit convey any aggregate benefits is it a positive sum game we have here Schumpeter gave us an intellectual answer to the question Schumpeter said that regular savings they just reproduce always the same structure of production and only fiat credit is productive we could also call the Rambo answer in favor of fiat money the most widespread answer is the theory of idle resources which says that we have idle cash balances that can be suitably lent out by banks we have labor unemployed labor and other unemployed resources which can be mobilized by more spending but this answer is wrong because resources are strictly speaking never idle they are not presently used for reasons in particular the payment that is being proposed is too low from the standpoint of the present owners now if we simply create more money to pay higher prices for them then the purchasing power of the money is lower so we are not really offering a higher real payment but the same real payment idle cash is not detrimental from an aggregate point of view some Austrian economists have even praised cash orders the misers for example in this book defending the undefendables praised the miser because if you are hoarding cash it means that you exercise a pressure on all prices to fall there is less money in circulation which means that the purchasing power of the money used by all other people increases still all resources can be bought but only lower prices so the theory of idle resources leads into an economic policy built on illusions and deceit and this is ultimately self-defeating then we have a few rather cheap answers which I cannot fully address because I am running out of time cheap money, cheap credit doesn't facilitate sales it simply allows for sales at higher money prices but of course again at the expense of other people we are benefitting some at the expense of others we can save money or maybe get rid of money altogether we can promote innovation this is Schumpeter's answer and we can stabilize aggregate spending which would be the answer given by George Selgen and Lawrence Wyden nowadays so what's the Austrian take on the multi trillion dollar question the Austrian first of all stress that any money supply is equally good or optimal and that fear credit does not increase wealth but crowds are genuine savings because time preference tends to grow up it benefits always some at the expense of others to the Kantillon effect and it entails economic crises which have been described by the Austrian business cycle theory and it entails in the intervention spirals and the problems that we create through fear credit always provide a pretext for more government interventions so fear credit does not solve any credit related problems it does not diminish the risks that we face in the economy neither market risks nor political risks it doesn't diminish agency problems it does not improve entrepreneurial qualities it destroys genuine trust and credit because credit is cheap so we don't need to pay that close attention to whom we are lending our money trust and true credit do not count that much it creates incentives for business practices that fragileize banks in the financial industries the unlimited availability of credit coming from central banks in particular creates incentives for banks to diminish their equity capital and go into more debt diminish liquidity and seek more risky investments so this is a poisonous cocktail that then leads to financial crisis and then gives a pretext for more interventions as we witness right now with governments regulating the financial industries a lot more and as we also observe right now fear credit facilitates spiraling debt not only the greed page but in other cases too that ends up either in hyperinflation or in total government control so in conclusion credit tends to have aggregate benefits if it is created competitively based on property rights and if these property rights are originating in self ownership and homesteading that is what it provides on the other hand fear credit tends to lack any overall beneficial effects it is just a redistribution tool that allows some to enrich themselves at the expense of other market participants and it has various harmful consequences from an overall point of view it fragileizes the financial industries makes them more vulnerable to to any sort of shortage of resources to invest in too many investment projects that cannot be possibly or realized with the available quantities of real resources so this was my distinction between credit sound credit and fear credit thank you for your attention