The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Kevin: David, as promised, we talked about looking at Keynes again, even though it is an ugly picture. We have as our guest today Hunter Lewis.
David: Kevin, I think the importance is this: We see experiments over, and over, and over again, with bailouts, both here in the U.S., and in Europe, and around the world, and they are predicated on the same things – basically, Keynesian economics. We are now into the third round of bailouts for Greece. The first didn’t work, the second didn’t work, and the third – of course it will work. At least that is the belief, and we do the same thing over and over again, believing, not that the method was wrong, but that we were only wrong by degrees. We should have done more of the same. We didn’t do enough of it. We didn’t spend enough. Billions weren’t enough, we needed hundreds of billions. Hundreds of billions weren’t enough, we needed trillions. Trillions weren’t enough, and this is the same kind of insanity that led to the Havensteinian nightmare, if you will…
Kevin: Back in the early 1920s.
David: Exactly. Dr. Rudolf Havenstein was a very smart man, a national icon in Germany, and he had the full support of the academics of the day, saying, “If things are getting more expensive, just print more money, and that way it will be more affordable,” and everyone loved the idea, and no one questioned some basic assumptions. I think that is what I love about now turning back and saying, “Let’s pause, let’s think about this. We need to reassess the way we view economics.”
This is a dismal science. Nobody particularly likes economics, but listen, your life is being predetermined for you by economic, fiscal, monetary policies, not only here in the United States, but around the world, where there is collaboration, and everyone is agreeing that we should do the same thing. This is the definition of insanity, Kevin, in which you do something, it doesn’t work, and yet you do it again, and again, and again. I want to explore that a little bit with Hunter Lewis today.
Kevin: David, it defies common sense, and that is the thing that Keynes was known for, defying common sense. Last night I was grilling steaks on the grill and we were talking to my son. He doesn’t live here, he is up in college in Boulder, and he said, “Who do you interview tomorrow?” I said, “Hunter Lewis. He wrote the book, Where Keynes Went Wrong.” Then I started to say, “Okay, here is what Keynes believed,” and he cut me off, and he said, “Dad, I know what Keynes believed – spend more.”
David: It is interesting. I think it is becoming more common knowledge that the guy was a bit of a quack. He agreed with Sylvio Gesell’s idea that you print money with an expiration date on it. In other words, you don’t save it. If you own it, you need to get out there and get it moving.
Kevin: Penalized for saving, basically.
David: He loved progressive taxation where you take more from the wealthy and redistribute it to those who have to, or will, spend every bit of it, rather than save and invest. He loved the idea of setting interest rates at zero and keeping them there permanently.
Kevin: How in the world would anybody retire? I don’t understand. If you set interest rates at zero, what is your CD going to do for you?
David: It is the issue of price controls, central planning, government monopolies, the role of the state being bigger and bigger because they are better and better, in his mind, and you do see shades of a world view that puts the state in control of everything. In fact, that was a part of Keynes’s ideals, not just in economics, but in politics. If you go back to Plato’s Republic, you find that Plato really fancied the philosopher king as the person who should be making all the decisions, and you couldn’t trust the hoi polloi, the average voter. “Well, just what do they really know? And really, things should be centralized around one person.”
Ironically, you find this figure, the philosopher king, being at the center of the universe. Keynes was no different. He created a structure of thought which propelled him to the very top. Basically, it should be central planning, and I am your consigliere. I am your advisor. I am the philosopher king from behind the scenes who is dictating, not only political issues, but economic, as well.
Kevin: David, with that in mind, when we have taken economics classes in the past, we have had these ISLM curves, and we have had a lot of different equations. It becomes so amazingly complicated, when in reality, really, all that is being taught is that you need to make sure that you don’t spend more than you make, and you spend productively what you spend. I would just say, when you had us read this book a couple of years ago, Where Keynes Went Wrong, the entire office, and then we discussed it, it was a way of condensing voluminous material on Keynes, and I wouldn’t encourage anybody to just go sit down and read all of Keynes’s material. Not only does it not make sense, but it is unnecessarily complicated so that the person actually is intended not to understand what he is reading. But this book, Where Keynes Went Wrong, is a great summary of Keynes, and why it doesn’t make sense, and then what does make sense, wouldn’t you say?
David: I would, and Kevin, I think this is one of the things that gets to the heart of it for me, and I think for our listeners, too. The fact that Keynes did not take a look ahead, he was not concerned about the future, he did not care about future generations. It was not in his equation at all. Everything was about the present moment, and that is reflected in his own life, it is reflected in his personal decisions, it is reflected in his orientation to an economics which is driven by success today, irrespective of what happens tomorrow.
Kevin: Like the cavaliers. “Eat, drink, and be merry, for tomorrow you may die.”
David: And he justified it by saying, “In the end, we’re all dead.” So by putting that finality out there, he concentrated on the here and now, so much so, Kevin, that he betrayed future generations. I think that is what we have to be cognizant of, as thinkers, as actors, in the marketplace today. We cannot afford to betray future generations as our current body politic has done, and will continue to do, to the degree that it continues to hold Keynesian ideas in its stock of beliefs. And this is why Hunter Lewis is joining us today.
David: Joining us again today is Hunter Lewis, and the discussion is Keynes, his book, Where Keynes Went Wrong. I have gone through the book, yet again, and this is a book that we read in the office, nearly two years ago, and benefited from immensely. It is on the shelves of every person in the office and we had some in-depth discussions, not only about what Keynes said, but just how confusing, at times, it can be, and almost incoherent, except the man was truly brilliant, and that was how he got away with saying what he did. No one really wanted to challenge him.
What Hunter Lewis has done in his book, Where Keynes Went Wrong, is to parse out some of the things said, and what has been misconstrued, what has been put into place as policy, and assumed to be good economic theory. I couldn’t recommend the book more highly. You can either get it in hardback or paperback. Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles and Busts.
Thank you for joining us, Hunter.
Hunter Lewis: It’s a pleasure.
David: In some respects, Keynesian economic theories were simply a justification for his own personal choices and ethical leanings, really, as a rejection of 19th century social conventions or values, what was conventional morality at the time, including things like thrift, savings, maybe even an orientation to the future, the 19th Century certainly had that, predicated on traditional family structures, and again, savings for future investment. He really had a focus on the here and now, maximizing the present, whether it was present pleasure, or present economic stimulus. Maybe you can look at where we are today. We had this conversation, to some degree, two years ago. Has anything changed in the last two years in terms of the government pursuing a more or less Keynesian solution to the current economic malaise?
Hunter: Not only has our government not changed, but every government in the world is continuing to follow the same Keynesian policies, and of course, they haven’t worked, they aren’t working, but we just keep doing more of the same.
David: We find ourselves looking at the classic phrase, “A spoonful of sugar helps the medicine go down. In this case, that simple shot of sugar helps the system feel better, although it doesn’t necessarily bring health. The criticism of Keynes, and this is a self-reflective criticism by practicing Keynesian economists, seems to be that 2008 rolled around, and we gave it a spoonful. Now, we have found that we needed a cupful. Now we need a wheel barrowful. Now we need a dump truck-full. The only criticism seems to be that we didn’t do enough, and there doesn’t seem to be a preceding criticism of, “Does this actually work?” Maybe you can comment on that.
Hunter: First of all, back in 2009 when we were coming out of the crash, in the first interview I had about the book with the BBC, they said, “Are you proposing to take the patient off life support?” And I said, “That’s the wrong way to look at it. It’s not life support, it’s just more alcohol for the alcoholic, or it’s more heroin for the drug addict. Then of course, you need more and more of that to keep an addict from being in withdrawal, but it doesn’t help the problem, it just makes it worse, and that’s essentially what has been going on.
Moreover, the most interesting thing to me is that as time has passed and these solutions have not solved anything, but, in fact, they’ve made it worse. None of the Keynesian economists who were propounding, “Let’s have more stimulus,” are providing any justification for it, on a theoretical basis, or an evidence basis. They just take it for granted. In every article you will read, even the recent one by Robert Shiller, in which he said, “It’s undeniable that we need more stimulus now.” He doesn’t explain why it’s undeniable, because the truth is, there is no logic and there is no evidence for it.
David: One of the things you point out in your book, Hunter, is that that actually was the force of argument that Keynes used, himself. It was stated so emphatically that there really wasn’t evidence that was provided, and he got away with it. In his General Theory, it’s not as if he built a case, he just stated emphatically, “Thus so,” and everyone went along with it. That has been, I think, one of the particularly insightful things about your book is that, really, it is just a statement, there is nothing there that supports it.
Maybe we can look at some of the things that you and I would share in common a criticism of, but maybe the listener doesn’t know just what it is that gets under my skin, and I think perhaps yours, as well. Ideas like the rate of interest, set by the market. We are used to that. We look at the bond market as market practitioners, and see that people judge credit risk, people judge ability to pay. People judge all of these things, and give you, basically, a market grade. How do you fare in the pecking order? A junk bond may be 10-12%, and someone who is considered to be a good credit risk is maybe 2, or 3 or 4%. So there is that grading in the marketplace. As far as Keynes was concerned, the rate of interest, if it is set by the market, is always too high, with the ultimate target being zero. Why would Keynes target a zero interest rate policy – which frankly, sounds very familiar today – why would he target that as a perpetual ideal?
Hunter: This goes absolutely to the heart of what is wrong today. We have a market system which is based on prices and profit, and yet, the government keeps interfering with the price system, and it is the price system that tells everybody in the market what they need to do. So they are really shutting off the flow of information that is essential to prosperity.
When you have high unemployment, that tells you that there is something wrong with the price system, that there are prices that are not in the right relationship to each other, and yet, the government keeps messing up the biggest, most important prices of all, one of which is interest rates. The system really can’t function if the information that the market is providing in the form of the interest rate, is not available.
And of course, it makes no sense at all, as Keynes advocated, to keep driving interest rates down to zero and hold them there. That is essentially giving away money. And of course, we are giving away money, today. The Federal Reserve provides newly printed money to Wall Street, to firms like Goldman-Sachs. They are getting virtually free money, and of course, they make a lot of money with that money, themselves. So then we have this problem of crony capitalism that goes along with it – all these people who are getting rich off these government policies which are not helping the economy as a whole.
David: You raise an interesting point. The market system is dependent on an information feed, and prices tell you what is happening, whether it is healthy or unhealthy, and for governments to step in and play with the price system, via interest rates, is distorting the information feed, and it confuses investors. It also, with a zero interest rate policy, disincentivizes savers. That is also at the heart of Keynes, is it not? That you really don’t want there to be a saving, or using the 19th Century language, a rentier class?
Hunter: That’s right. He basically suggested that the government could print new money. That money would flow into the economy in the form of debt, and that would take the place of savings, but there is just no evidence for that at all, there is no logic behind that. In fact, if you want a good economy, what you need is savings, and you need then to invest those savings, and you need to invest those savings in a wise way.
Of course, Keynes completely ignores the issue of how you are investing. For him, not only is any investment equivalent to any other investment, but spending is equivalent to investment. It just doesn’t make any sense at all. If you want to restore the economy, you have to save, you have to invest, and above all, you must invest wisely.
David: And he went even further to say, whatever means necessary to use up those savings. You bring this out in your book. He argued that natural disasters, earthquakes, even wars, were a way to increase wealth by using up savings. I have to scratch my head on that one – the more you use up savings, even if it is for something like what just happened in Japan – that is productive? That is a move toward an increase of wealth for the Japanese? Help me understand that.
Hunter: It’s a complete logical fallacy, because the idea is that after the disaster, the Japanese have to spend a lot of money, and that will help the economy, but what that ignores is that they then can’t spend the same money on something else which would have been more productive. Obviously, just restoring what they had before is not the best investment they could make. The best investment they could make would be something new and productive. It’s illogical. It’s just a logical mistake on Keynes’ part, and yet, he made lots of logical mistakes.
David: It sounds awfully like the broken window fallacy.
Hunter: It is the broken window fallacy, which Henry Hazlitt wrote about a long time ago, back in the 1950s. Here we have the world’s governments basing their policies on Keynesian economic theory that just makes no sense.
David: We oftentimes discuss, here in the office, Thomas Kuhn’s book, The Structure of Scientific Revolutions, and the idea that there is no real evolution, but there is revolution within a theory of ideas, a theoretical framework. Whether we are talking about a scientific framework, or an economic framework, or even something relating to literary theory or philosophy, there tends to be a textbook community, a group of people who have agreed what is acceptable and true knowledge, and the educational system then perpetuates what is “real” or “true” or “reliable” information. Up until the point where you have problems that cannot be solved by the prevailing paradigm, people just accept it as common knowledge.
It seems we’ve done that with Keynesianism. Keynesianism is economics, largely, and as you said earlier, it is not just the U.S. government, it’s not just the Fed and Treasury, but if you go to any central bank or fiscal or monetary authority around the world, they have the same bias because, largely, they have studied at similar universities, and share that same textbook knowledge.
The point with Kuhn was, really, you get to the point where there are too many problems that can’t be solved by the existing paradigm, and then something replaces it. Do you see that as a possibility? And is the replacement a better one, or a worse one, given what we have in the social milieu today?
Hunter: Yes, there are, in effect, intellectual bubbles, just as there are economic bubbles, and Keynesianism is an intellectual bubble which is underlying the economic bubbles that we have had and that have gotten us into trouble. These things are very hard to change, but they do change, and an idea gets bigger and bigger and bigger, but eventually it does explode, the change comes very rapidly, and then it’s all put behind.
Some people have observed that there is a process in which these ideas change. First of all, an idea is ridiculed: Anti-Keynesianism, in recent decades, has been ridiculed. Then it is ignored – it is getting around, but you don’t want to give it any publicity: The major media today, in general, tries to ignore anti-Keynesian ideas. Then it is fought ferociously. Then, at the end of the process, everybody who fought it says, “Oh, I knew that all along.” That is the typical way that these ideas change. But, eventually, they do change, and they change dramatically. I have no doubt that Keynesianism is on its last legs, but in the meantime, billions of people are suffering as a result.
David: Yes, there is real human suffering, which is far more important than something that is, perhaps, catastrophic to one’s portfolio. Tying in something that you mentioned in your book, negative real rates, this is a chief consideration for everyone, and a consequence of that manipulation of interest rates, keeping them too low, too long.
Negative real rates – there are some practical considerations. You quote Peter Fisher, former Undersecretary of the U.S. Treasury, and New York Federal Reserve Bank. It is not as if officials at the U.S. Treasury or Fed are unaware of these issues, but he says capitalism is premised on the idea that capital is a scarce commodity and we are going to ration it with a price mechanism. When you make short-term funds available essentially free, with negative real rates, and you say rates lower than inflation have happened, for example, between 2001 and 2004, crazy things start to happen.
This is where we are today. We have negative real rates of return. There are different ways of constructing the inflation number – the models in the 1980s, the models in the 1990s, the way we count it today. Today it is less than 3%. If it was counted by the old model in 1990, it would be over 6. If it was counted by the Volker view of inflation, it would be double digit today. We have deeply negative rates, and it forces major misallocation of capital. Maybe you can talk about the consequences of being in a negative real rate environment and the bubbles that are perpetuated. Really, what was set forth in 2008 is the seed of a future problem. Would you agree with that?
Hunter: Yes, absolutely. But first, I want to stress the point you just made, which is that the way the government calculates inflation and unemployment today has changed a lot over time. Some of the biggest changes came during the Clinton administration. If we calculated unemployment the way we did in the 1930s, we would have depression levels showing right now, a lot more than what they are saying, and we would certainly have more inflation showing, as well.
We do have an environment of both inflation and unemployment and that, again, is just the result of these bubbles that have been blown up since the mid 1990s, and they have been blown up, just as you said, by holding interest rates too low, printing way too much money, in an effort to keep interest rates down. A combination of too much money and too low of an interest rate just creates a bubble. Meanwhile, again, the Keynesian economists – and that means most economists – say, “Oh, bubbles are just natural. Bubbles are just part of the market system.” If that is true, why is it we have had nothing but bubbles since the mid 1990s, and we didn’t have bubbles before that for decades? Again, it is just nonsensical to say that these kinds of bubbles are normal, when they are so evidently abnormal, and they are the source of our problems.
David: The business cycle is something that Keynes was not particularly fond of – abolish slumps, and instead, seek to maintain a perpetual quasi-boom, to paraphrase him. There was, in the 19th Century, a period, let’s say between 5 and 10 years, where it was more or less two steps forward, one step back, and a regular, if you want to call it, mini-boom and mini-bust cycle. Nothing deeply catastrophic, but surely painful to those who were on the wrong side of an investment, and those messes got cleaned up pretty quickly, again, in a two steps forward, one step back process. Keynes’s response was, “No – perpetual bliss.” And wasn’t his view really that of a utopian?
Hunter: Absolutely. As in any other utopian thinking, it just doesn’t make sense. It doesn’t recognize reality. The truth is that mild recessions are the price you pay for avoiding deep recession. When you try to eliminate mild recessions, as Alan Greenspan did, and Bernanke did, all you do is create the kinds of problems we have today.
But even in the past, when you had deep recessions, or even depressions, they didn’t last long. The market cured them in fairly short order. The early 1920s depression is a good example of that. The government did nothing and it was over in about 14 months. Contrast that to the Great Depression, or the kind of problems we have had since, where it just goes on, and on, and on, because the medicine the government applies actually just makes the patient worse. It provides temporary relief, but then it doesn’t solve the problem and makes it worse in the long run, or even in the short run.
David: You are talking about Harding, and his response, essentially, to Herbert Hoover. Hoover suggested they pump tons of money into the system in a very Keynesian fashion. Harding said, “Go fly a kite,” and he cut the budget significantly. If I recall, he cut spending almost in half, and we went from a 12% rate of unemployment, to 2%, by 1923 – 2% and change. A very different response, and it was, as you mentioned, a deep recession. It just didn’t last that long, because a different solution was offered by the Harding administration.
Hunter: Right. And there is more recent evidence of that sort, when the East Asian economy got into trouble in the late 1990s, they did not have the resources to apply Keynesian policies, they acted more like Harding and they got over it very quickly. They had a very strong rebound in no time at all, and that is in contrast to the countries that have practiced Keynesian responses, where they don’t get a rebound. They don’t fix the problem, they just make it worse.
David: Is it going to be a surprise to the average man in the street, or woman in the street, who comes to terms with this bankrupt ideology – will it come as a surprise to them just how nonsensical it was to believe in it? And how Ph.D.’s, very, very bright men, have held to these views, which are utterly nonsensical, and very against common sense? I go back to the Redbook article that was from 1934, in which John Maynard Keynes wrote in answer to the question, “Can America spend its way into recovery?” He answered, “Why, obviously, the very behavior that would make a man poor, could make a nation wealthy.” Is it going to pass muster with the voting public that politicians of both stripes, that academics, that Wall Street geniuses, to some degree, rely on Keynes as an intellectual pillar?
Hunter: Keynes was always the smartest kid in the class. He always had his hand up, and he was always telling the teacher, “No, everything you are saying is wrong.” He loved to provide what seemed to be a paradox. If too much debt causes a crash, load on more debt. It’s okay to grow debt faster than income, indefinitely. If debt becomes too burdensome, just cut interest rates. If low interest rates are causing bubbles, just lower them further. He was a specialist in these kinds of paradoxes.
And it is generally thought today that economics shows us that it is an area, it is a discipline, where common sense is actually wrong. But that in itself is wrong. Real economics, which is completely violated by Keynesianism, does reflect common sense. That’s what you need, you need common sense. You cannot violate common sense and expect to do anything for the poverty in the world, or to help the middle class. You have to have common sense policies. And it is just incredible that brilliant people, like Robert Shiller, a Yale professor and greatly respected, just keep clinging to these views, even though there is no logic, and no evidence offered to support them. They are just completely assumed.
David: In recent weeks we have talked about the Fed getting very aggressive in providing liquidity to Europe. It is just within recent days that they have done that, that they are providing ample liquidity through currency swaps and short-term lending via the EC in a coordinated effort with the ECB, the Swiss National Bank, the Japanese. We are re-liquefying the system yet again, and the amazing thing is that the markets love it. The markets absolutely love it. Are the markets really that bright, that they should be saying, “Hey, this is fantastic?” To me, it looks like the smile on the face of the dope addict who just took another hit, and “Boy, isn’t this grand?” Am I seeing this accurately?
Hunter: When we talk about the market, in this case, we are really talking about Wall Street, and Citi and people like that, and as I alluded to earlier, Wall Street has gotten rich off of all these bubbles. Wall Street gets rich off the printing of the money, and keeping interest rates low. They love this kind of thing, and they are only concerned with how much money they make in the next quarter, or the next year, and they are certainly not concerned with the long term. So it is not surprising that the stock market goes up when these fallacious policies are pursued even more intensely.
In terms of Europe, one of the big factors is that the European Central Bank operates under rules in which, if there is any default of the bonds that they hold, they have to sell them immediately, or not count them as capital. So the European Central Bank is faced with technical bankruptcy unless they just completely refinance, if Greece defaults. Just for that reason alone, they are doing everything possible to avoid the default. What a default actually is, is just a recognition that there is way too much debt, it cannot be repaid. That is called reality. That is called common sense. And throwing more money, more money, and more money, after bad, is not common sense.
David: I did a radio interview here in the last day, and the gentleman in Houston said, in a somewhat unrefined manner, “I look at gold as my stupid politician insurance.” I was thinking to myself, “You know, I might have said it differently, but we are really talking about insurance against Keynesian economic policies when we look at a money substitute like gold. Combine negative real rates of return, combine poor policy and the fact that this is really ideologically driven, and there really is a commitment to the ideal. Someone wrote a thesis, they have staked their professional career and reputation on it, there is ego involved, and no one is going to recommend a different course until we have actually gone off the cliff. Is there a reason to assume a different investment thesis at this point, that, really, insurance is unnecessary? Or should we still prioritize insurance in the equation, perhaps not against stupid politicians, but ideas that are bankrupt, themselves?
Hunter: No, I think insurance is even more important. Every day that passes, it just gets more important. There are different scenarios of where we go from here. We could head into a major depression, or deflation, or we could head into a major consumer price inflation, or a combination of the two, but protecting yourself against both is extremely important. In the old days, you could protect yourself against depression by owning bonds, and the longer the bonds, the higher quality, the better, but that doesn’t work right now because the chances of inflation are so great, that could destroy the value of bonds. So the only things you can really rely on now are cash as a deflation hedge, gold as somewhat of a deflation hedge, and gold also is also a great inflation hedge, so gold is really the prime asset. And the irony about gold is that the trouble of holding gold is that you don’t earn any income on it. That would normally make it seem disadvantageous to do so, but because the politicians are holding interest rates so low and refusing any kind of return to the saver, it makes the lack of income return on gold seem not so bad.
David: That is the issue of negative real rates, and going back to Gibson’s paradox and the Summers-Barsky thesis: Low-to-negative rates drive investor interest into something that represents almost a sideline position. “If there is too much risk and no reward, then just count me out until I can look at productive assets with a keener eye to benefit.” Again, we go back to our original point. This is a market system, based on prices and profits, and if profits are taken out of the equation, then people look to opt out, so to some degree, gold is an opt out.
Hunter: I just want to add that Keynesians, of course, say that if you buy gold you are hoarding, if you just keep a savings account, you are hoarding – you are not investing, you are a hurting the economy. But actually, you are helping the economy, because you are keeping capital available for future investment when the opportunity finally arises to make a good, sound investment.
David: It seems, though, if people look at the price of the insurance – you have credit default swaps, for instance, an insurance against default, against a particular underlying asset. Let’s take Greek paper, as an example. It is trading at records of 3 million dollars for every 10 million dollars of underlying paper, or over 3000 basis points, and that is even with the new ECB and U.S. interventions. That insurance seems expensive, and yet, it also seemed expensive at 2000 basis points, it seemed expensive at 1000 basis points, it seemed expensive relative to other types of insurance at 500 basis points. The argument is being laid similarly against gold. It was expensive at $900, it was expensive at $1200, it was expensive at $1500. This insurance continues to get more expensive. At what point does it just not make sense to buy the insurance, because it is just flat too expensive?
Hunter: Again, the Keynesian argument would be that gold is in a bubble, that it is going to burst, and every time gold retreats a bit, you read, “Ah, the gold bubble is bursting.” But I don’t think it is a bubble at all. I think it is still just insurance, and it is still sensible insurance at this price, and that it has potential to go up a lot more because, unfortunately, politicians are not going to change what they are doing anytime soon.
David: With the existing stock of thinkers, we probably won’t see remonetization of gold, but with a different stock of thinkers and policy makers, do you see the potential for a partial remonetization?
Hunter: Yes, I think that there is a great potential. In fact, I am sure that is what will happen, eventually, and it might come sooner than people think, because as the monetary system breaks down, they are going to have to find a new monetary system, on short notice. Monetary systems do tend to break down every 40, 50, 60 years. And when they do, they are doubtless going to bring gold back. The danger is that they will bring gold back in an inadequate way. People talk about the gold standard being a problem in the Depression. Well, we didn’t really have a gold standard then. And you can have a phony gold standard, as we did after World War II. But what you really need is a true gold standard, of the sort that existed before World War I, before the Federal Reserve was created. But it is less likely that they will do that.
David: It seems that it is less likely because it limits government spending, and certainly, the gold exchange standard, as a quasi-gold standard, that you just mentioned, allowed for greater flexibility, so to say, and freed politicians to spend wantonly. You are suggesting bringing it back in part might now be enough, going back to the old gold standard, circa 1860 to 1914, or what the Brits had from 1717 forward, with the exception of wars here and there. What is the political context that would legitimize a full return to the gold standard?
Hunter: I think the present monetary system will collapse, and when it does, they will bring back a so-called gold standard, but it will be something more like Bretton Woods, what we had after World War II. They certainly won’t bring back a full gold standard if they can possibly avoid it. I don’t expect that to happen, but that is what is needed, because that is the only way to really control government, as you said, and prevent more and more of the same Keynesian policies of print money, spend money, borrow, spend, and bailouts. All of that would not be possible under a true gold standard.
David. We had an interesting conversation with Giulio Gallarotti, and his comment was that under a system of universal suffrage, it is very difficult to maintain those disciplines. Politicians are inclined to spend more on their constituency groups than under a gold standard, or what a gold standard would allow for, so perhaps a return to disciplines reflective of the gold standard, but certainly not a return to the full gold standard. And he said the era of post World War II was different. We have moved toward universal suffrage, and politicians won’t allow for it, and frankly, neither would constituency groups, because it would mean less money from the government trough. Would you feel like that is an accurate assessment?
Hunter: No, because the problem is not the universal suffrage, the problem is the special interest groups.
Hunter: The special interest groups, the big businesses, the unions, the trial lawyers, and so on – they are the people who are active in Washington and Wall Street, who are actually deriving benefits from all these Keynesian policies, and the country as a whole is not, the average voter is not. If the average voter really understood what was going on, they certainly wouldn’t support this kind of thing.
David: That’s a very good distinction.
Hunter: There is nothing about democracy, I think, that leads us to this problem. In fact, we need more participation from the average voter and the average person, not less.
David: You see the present monetary system unwinding. Any thoughts on the euro? Any thoughts on a basket of currencies? Certainly, Keynes was fond of the Bancorp idea. The IMF and the SDR structure is certainly being bandied about a bit. What do you see as the world’s money system 3 or 4 years out? What would you speculate would be our reality?
Hunter: The most likely outcome would be to try to go back to the system that Nixon destroyed – the post World War II system. But certainly, we don’t need Bancorp, we don’t need the SDRs. That is just an international organization printing money, in addition to individual governments printing money, so that just magnifies the problem and makes it even worse. What we need to stop is all the money printing. That certainly doesn’t take us where we need to go.
David: Something very similar to Bretton Woods where currencies relate to a particular sound, or more sound, currency. That was the dollar. Do you think that is the dollar still? Barry Eichengreen would argue, probably not, it will have to be a duopoly, certainly not a dollar monopoly, any longer.
Hunter: Yes, it is quite hard to imagine that the dollar would remain the sole reserve currency under a new system. That certainly is not very likely. In terms of the euro, I was just hearing on the radio yesterday, a distinguished commentator saying, “We have a choice here, either the European governments will intervene and rescue the euro and save the day, by basically bailing out Greece, and other countries, or they will let the euro collapse and that will be a disaster, and that will cost the European government much more money in the long run – six times as much money.”
But that is just all fallacious, because bailing out Greece, or bailing out Portugal, doesn’t solve anything. Again, you have to accept the reality that their debts simply cannot be repaid, you have to accept default, and you have to rebuild from there. The idea that those are the only two choices is just basically ridiculous. And we also have to keep in mind that, actually, if they kicked Greece out of the euro, the euro could appreciate considerably, so there actually is the possibility that if the Germans don’t buckle under, and they kick bad performers out, they could actually make the euro a very attractive currency again, more attractive than the dollar. No one is talking about that possibility.
David: That has been our position, that if you take the barnacles off the underside of the boat, you have much smoother sailing.
David: What you said about the distinguished commentator from Europe giving those two alternatives, I just want to come back to your book, because this is one of the gifts that you have, Hunter, in pointing out the logical inconsistencies. Here is one example of the fallacy of false alternatives. You look at Keynes and you say, “Come on, he is misusing technical language, he shifts definitions, he misuses even common terms, he confuses cause and effect, he creates things that are representative of false determinism. And I think it is a very fair portrayal. You let him speak, and then you add some comment to it, and say, “Guys, come on, wait a minute. Does this make sense to you?” It is not just common sense, but also a keen criticality, a real insightful, logical appraisal of where Keynes went wrong.
I want to encourage listeners, if you don’t feel like you know what is being done to you, not necessarily for you, but to you, under the current administration, the past administrations, and as we have pointed out in this conversation, not just here in the United States, but globally, by the fiscal and monetary authorities, you should know Keynes. You should know him on a first-name basis. You need to get to know him. Make your introduction to him. Get a copy of Hunter’s book. If you have interest beyond that, then certainly, order an original copy of Keynes’s writing, and dig into the primary text, as well, but this is a great introduction.
Hunter, I want to thank you for opening up the conversation and getting people thinking. We don’t know, in the future, what will have turned the tide, but you have offered an opportunity. You have set something out there that I think critical thinkers, people who care about our country and the direction it goes, and frankly, the world, can look at and say, “Wow, I didn’t think about that. I need to reappraise. I need to check my assumptions. As logical as my macro-economics class in college seemed, it appears that the professor, and myself, didn’t reassess our assumptions, and that needs to be done.” Thank you for raising the questions, and presenting that for the average American to take a look at and say, “We need a different set of ideas. Let’s see if we can get that done.”
Hunter: Thank you, it’s been a pleasure.
David: We look forward to our future conversations, and again, you can find Where Keynes Went Wrong at amazon.com, or at any of the media outlets, in either hardback or paperback. We ordered it by the case, and hope you will, too.