Recently by Robert Wenzel: If You Ever Need To Escape With Your Wealth From a Totalitarian State…
At the invitation of the New York Federal Reserve Bank, I spoke and had lunch in the bank’s Liberty Room. Below are my prepared remarks.
Thank you very much for inviting me to speak here at the New York Federal Reserve Bank.
Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.
That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System
My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macro-economy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.
I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality.
Please allow me to begin with methodology, I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.
In the science of physics, we know that ice freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed..
There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.
And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building.
It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building.
Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.
I also find curious the general belief in the Keynesian model of the economy that somehow results in the belief that demand drives the economy, rather than production. I look out at the world and see iPhones, iPads, microwave ovens, flat screen televisions, which suggest to me that it is production that boosts an economy. Without production of these things and millions of other items, where would we be? Yet, the Keynesians in this room will reply, But you need demand to buy these products. And I will reply, Do you not believe in supply and demand? Do you not believe that products once made will adjust to a market clearing price?
Further, I will argue that the price of the factors of production will adjust to prices at the consumer level and that thus the markets at all levels will clear. Again do you believe in supply or demand or not?
I scratch my head that somehow most of you on some academic level believe in the theory of supply and demand and how market setting prices result, but yet you deny them in your macro thinking about the economy.
You will argue with me that prices are sticky on the downside, especially labor prices and therefore that you must pump money to get the economy going. And, I will look on in amazement as your fellow Keynesian brethren in the government create an environment of sticky non-downward bending wages.
The economist Robert Murphy reports that President Herbert Hoover continually pressured businessmen to not lower wages.
He quoted Hoover in a speech delivered to a group of businessmen:
In this country there has been a concerted and determined effort on the part of government and business… to prevent any reduction in wages.
He then reports that FDR actually outdid Hoover by seeking to raise wages rates rather than merely put a floor under them.
I ask you, with presidents actively conducting policies that attempt to defy supply and demand and prop up wages, are you really surprised that wages were sticky downward during the Great Depression?
In present day America, the government focus has changed a bit. In the new focus, the government attempts much more to prop up the unemployed by extended payments for not working. Is it really a surprise that unemployment is so high when you pay people not to work.? The 2010 Nobel Prize was awarded to economists for their studies which showed that, and I quote from the Noble press release announcing the award:
One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.
Dont you think it would make more sense to stop these policies which are a direct factor in causing unemployment, than to add to the mess and devalue the currency by printing money money?
I scratch my head that somehow your conclusions about unemployment are so different than mine and that you call for the printing of money to boost demand. A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%.
I also must scratch my head at the view that the Federal Reserve should maintain a stable price level. What is wrong with having falling prices across the economy, like we now have in the computer sector, the flat screen television sector and the cell phone sector? Why, I ask, do you want stable prices? And, oh by the way, hows that stable price thing going for you here at the Fed?
Since the start of the Fed, prices have increased at the consumer level by 2,241%. Thats not me misspeaking, I will repeat, since the start of the Fed, prices have increased at the consumer level by 2,241%.
So you then might tell me that stable prices are only a secondary goal of the Federal Reserve and that your real goal is to prevent serious declines in the economy but, since the start of the Fed, there have been 18 recessions including the Great Depression and the most recent Great Recession. These downturns have resulted in stock market crashes, tens of millions of unemployed and untold business bankruptcies.
I scratch my head and wonder how you think the Fed is any type of success when all this has occurred.
I am especially confused, since Austrian business cycle theory (ABCT), developed by Mises, Hayek and Rothbard, has warned about all these things. According to ABCT, it is central bank money printing that causes the business cycle and, again you here at the Fed have certainly done that by increasing the money supply. Can you imagine the distortions in the economy caused by the Fed by this massive money printing?
According to ABCT, if you print money those sectors where the money goes will boom, stop printing and those sectors will crash. Fed printing tends to find its way to Wall Street and other capital goods sectors first, thus it is no surprise to Austrian school economists that the crashes are most dramatic in these sectors, such as the stock market and real estate sectors. The economist Murray Rothbard in his book Americas Great Depression went into painstaking detail outlining how the changes in money supply growth resulted in the Great Depression.