Mish's Global Economic Analysis

Uploaded by GoogleTechTalks on 01.06.2009

>> I'd like to welcome Mike Shedlock. He is the author of Mish's Global--Global Economic
Analysis. It's one of the most read blogs on economics on the internet and it was ranked
by Time.com as one--as the number one Economics blog on the internet. And so I think it'll
be a very interesting talk to hear Mish talk today about the state of the economy, but
then also, how he started with blogging and what the rule products like blogger has meant
to his career, so welcome Mish. >> SHEDLOCK: Hello, I'm Mish. It's a pleasure
and an honor to be invited here to speak at Google. I'm a registered investment adviser
for Sitka Pacific Capital Management. I have a blog called GlobalEconomicAnalysis.blogspot.com
that's a mouthful to remember. So the easy way to find my blog is just--just do a Google
search for Mish, M-I-S-H. Everyday I write about topics on interest rates, gold inflation,
deflation, housing, the economy primarily from a macro point of view. I'm very passionate
about what I write. My journal advice to everyone in this difficult economy is to find something
you like to do, do it well because life's too short to do something you dislike to do.
I have fun when I'm writing. In fact, often I'm laughing my head off as I'm writing so
I hope it comes across that way and I hope others are laughing too when they're reading
what I write. I'm here not only for Google's world famous free launch but because of Google's
free launch. Here's my story; my background's not economics nor Wall Street or finance but
rather computer programming. I worked as a mainframe computer programmer analyst for
over 20 years in some of the largest banks in the country; Bank of Montreal, Paris, First
National Bank of Chicago, First USA, Chase and others. The last four years of that run,
I was an independent consultant. I lost the consulting contract after 911 and never got
another one. I was out of work for three years, I had no income and when I told people to
be prepared to lose their job and to have cash saved up if they do, I'm actually speaking
from personal experience. For those out of work, being short on cash is no fun yet, everyday
I--for years people are telling me that cash is trash. After 911, I spend a lot of time
on stock message boards, learning everything I could about the stock market in the economy.
I had some great teachers but no income. Somewhere along the line, a head fund manager offered
me a temporary job but I knew that slot was going to end in less than a year, so I had
to find something else to do. As luck would have it, in early 2005 a person on the stock
message board did I run on sold kind investor posted something with the effect of, "Hey
look at this, Google has these things called blogs. We can post our thoughts on them, they
are really cool." He goes, "I just started my blog. If anyone needs help starting theirs,
I'll help you." He went on to say, "And best of all, blogs are completely free." Completely
free, those are magic words. When you're out of work with no income, completely free is
not just a good thing, it's actually a requirement. I took my friend's offer and he created the
first template from my blog in 2005. I started my blog hoping that someone would discover
me as a writer. Given there's 10 million blogs out there, that's a--not might be the business
plan in the whole world. But it happened. A few months after my blog was up and running,
a company hired me to write a stock newsletter. I did that for a while, about 18 months. However,
I'm not fond with the paid--paid newsletter model. They're simply too much good information
out there for free at your fingertips just by doing a Google search for things. To break
away from the newsletter model, I took and passed a series of 65 exam and became a licensed
registered investment adviser for Sitka Pacific Capital Management. By the way, many people
will recognize the name of the person who created my initial blog, it's calculated risk.
He now has the number one economic blog in the country by page counts and I'm number
three. My traffic's roughly 1.5 million page sets a month and my current business model
is ad revenue off of my blog to supplicate as a percentage of assets under management
at Sitka Pacific Capital Management. Most of my clients found out about the investment
opportunities at Sitka from--simply from linking on a link on my blog. I actually seldom discuss
Sitka on my blog. I don't have to, a return speak for themselves. With everything going
on keeping my blog up and running is now a very high priority. It's painful when my blog
is down. RSS stops working as it has happened on several occasions. I'm grateful for Google's
free blogs and, indeed, I might not even be here today without them. However, my viewpoint
regarding free has changed because of the necessity as opposed to the desire to keep
my blog up and running. I can't afford for my site to be down or have RSS stop working
or many other things that have actually happened to my blog over the past couple of years.
Blogger help is nonexistent, there is no one to call for help and the blogger help forms
are essentially worthless. So, please consider some kind of tear support for those people
bringing in significant ad revenue to Google. I'm asking for a support member, I'm even
willing to pay for it. Now there's something, if a deflation is like me, is willing to pay
for something, there's got to be a ton of other people out there willing to pay for
Google's support as well. Moving on to the economy. Well, free blogs are good idea at
least to get started, free money is not and where in this mess because Greenspan threw
money at every problem we faced. No matter what the problem, real or imagined, Greenspan
cut interest rates to stimulate the economy. In 2002, we cut rates to one percent to bail
out his banking buddies who would then were in hock to deepen loans to Latin America that
were not performing. And also to loans the Dot-com companies that were never going to
be paid back. The Feds actions fuel the biggest credit expansion in history. In Florida, people
started camping out overnight entering lotteries to buy a--standing in line to buy condominiums.
In the summer of 2005, cover of Time magazine is, "Why We're Gaga Over Real Estate." I looked
at that, wow gaga. Cinema does not get much more extreme--extreme than Time magazine going
gaga over real estate. I looked at that and I wrote a post--a blog post that summer and
I said the housing peak was in, indeed it was. However, cinema persisted for a full
year that there was no housing bubble. The real estate manager was all real estate is
local even after state, after state, after state started blowing up. Cinema then morphed
into a "Don't worry it's just a sub prime problem" and that mentality lasted another
year. Even after Bear Stearns blew up, Ben Bernanke, FED Chairman, came out and said,
"The problem was well contained." Well contained. A short while later, the FED embarked on a
biggest rate cutting campaign in history. Le Man went bankrupt, AIG went into receivership
and had not been for massive government bailouts with taxpayer money, Citigroup and Bank of
America would have gone under as well. Yet, you still hear the claim, "No one saw this
coming." Well, they weren't reading Calculated Risk, Naked Capitalism, The Big Picture, Nouriel
Roubini, or my blog or for that matter, any number or hundreds of other blogs who walk
all this crisis better than all the economic experts. Now, instead of listening to the
people who called this an advanced the Obama administration like the Bush administration
before it, is taking advice from three groups of people. Those who caused the problem, those
who didn't see it coming and those who believe throwing money at the problems are going to
fix it. Japan proved without a doubt that throwing money at the economy to jump start
it does not work. All it does is sink a country deeper in to debt. Unfortunately, that is
the path that we've embarked on, thanks to Geithner. What I find interesting is the average
8th grader can understand that if reckless lending and easy money created this mess,
then reckless lending and easy money cannot possibly be the cure. Meanwhile, we got Nobel
Prize winning economist who can't seem to figure this out. Actually, I can run about
this for hours but I think your time might be better spent by addressing what's on your
mind not mine. So with that, I'll take any questions anyone has. The question is it looks
like the stock market is heading back up. Where's the economy heading? Is this a false
temporary blot? Well, here's the way I look at it. All they've done is attempt to recapitalize
banks at the expense of taxpayers. There's still not done any problem anything to help
out people who are out of job, people who are underemployed. I have people emailing
me that they are working part-time now for 10 hours and they used to be working 40 hours.
All of that is still putting pressure on real estate prices. Real estate prices, I don't
think are going to come back until 2012 at the very minimum. And I see no source of driver
for jobs. Housing was a huge driver for jobs, looking back a few years ago. I think Greenspan
actually created a bubble on purpose, like I said, to bail out his banking buddies who
were at hock to a dot-com companies that were going under. So and look at all the jobs that
housing created. You know the trucking of stuff in from China, appliances, carpentry
work, roofing, home building, granite countertops, even grass seeds and plants for the lawn and
then, you know, trucking of that all stuff around. The truckers ate at restaurant truck
stops. I don't see any source of jobs that can possibly fill that void so, you know,
yes, at some point the economy is--is going to bottom but without a driver for jobs and
the green--Greenspan was very lucky. He had an internet boom and a housing boom. I don't
see why Bernake's going to have any such luck under him because I don't see what the next
wave of technology is that's going to create the jobs that either the internet did or that
the housing did. So at some point were going to smooth out here as in stop declining but
I don't see the economy is going to come roaring back any time soon and with that in mind,
the stock market is still very richly priced. Now, we don't know--no one knows where the
stock market goes. People ask me all the time, you know, "Mish where's the stock market going?
Where's gold going? Where are interest rates going?" The--it's funny. Everyone has an opinion
on that but the real answer is that they don't know and I don't know either. But what we
can say is these conditions still aren't very good economically. My own idea is kind of
that the stock market's going to go nowhere in an interesting way. We've had this reality
from 666 on the SMP500 all the way up to over 900 today and but I looked at that and saying
well at some point we're likely to retest that bottom, go back down there and test that
666 level. May be it holds, may be it doesn't. But given that there's no source of jobs,
real wages are falling for most people and so I think the stocks are still richly priced.
I think something like this is going to happen, maybe there's a stock record--rally is now
a 100 points to a thousand falls back down to 700 and rallies to 900, falls back to 800
and rallies to 850. I think the market's going to do something like that over the next four
or five years actually and that's my good scenario. My bad scenario is we fall back
into a double dip reception which I think I actually going to happen. When this one
ends we're going to slip back into it. And my bad scenario would have the SMP fall to
maybe 500 and then bounce between 500 and a thousand over the next five years. So but
we don't really know and it's important to take your cues from what the market is doing,
not what you think it ought to be doing. I certainly saw this bubble coming from a long
ways off going to housing bubble at the top of--in the summer of 2005. But it took two
full years more before the stock market started going back down. So started heading down in
and earnest way then it just crashed so, you know, we can see some sort of recovery here.
I think it's a false recovery just because there's no source of driver for jobs. So but
it's important to take your cues from what the market is doing because people that have--that
have seen these and have the same view point have been shorting the market lately and everyone
getting their heads handed them blowing out of the water. So we try and follow what the
market is doing and invest accordingly. >> Have you seen any markets or countries
who are doing something at least positive? >> SHEDLOCK: Doing something positive. Do
I see any markets or countries that are doing anything positive? Actually there's only one,
New Zealand. The Prime Minister of New Zealand came out and said, "You don't fix problems
by throwing money at them." But everywhere else in the world they're trying to fix problems
by throwing money at them. In the United States, in the UK, UK's arguably much worst off than
United States even. Uh, Canada, Australia, everyone's cutting interest rates, trying
to stimulate the economy. Our own congress is upset that banks aren't lending and I keep
asking myself, why should banks lend? What is it we need more of? Do we need more Pizza
Huts, do we need more Walmarts, do we need more Home Depots, Loads, do we need more Targets?
What is it we need? Nail salons? What is it we need? And I don't come up with the answer
to that. Yet congress wants banks to lend. The irony here is that banks are acting responsibly
for the first in a decade by not lending and congress is trying to force them to lend.
At a time when businesses have no real need to expand and consumers don't have a job and
can't spend. So all forcing banks to lend will do is, is cause more right offs down
the line. >> You've argued a number times in your blog
that we're in a deflationary regime. Persuasively I might add, because I think what you said
was the money that's being pumped in to the banks is to sustain there and not being lent.
I guess the question for those of us who are long on dollars right now is when, when did
those--under what circumstances does that money to start to come out and turn in to
inflation again? >> SHEDLOCK: The question is, the FED's been
pumping a lot of money into the economy. My view is it has been actually that we are on
the period of deflation and then the question is what happens to those dollars that the,
that the FED is trying to do. I have an analogy and lets say that I invented the perfect printing
press and the printing press was so good that I produced dollar bills--$100 bills that the
treasure itself could not tell from the real thing. And let's say I went out and printed
a trillion dollars worth of these things. Certainly, if I went out and started buying
things, prices of goods would--would start rising because of this money injected in the
economy. But if I printed a trillion dollars and bury those dollars in my backyard, what
happens? The answer is nothing happens. That money doesn't make its way into economy and
so prices of goods and services aren't bent up. You got a situation now where the FED
is printed tremendous amounts of money but is just sitting there at banks. Banks don't
want to lend it as we just talked about. So as long as that money's sitting there, it's
not going to affect prices of goods and services. Now the FED's are desperate to get banks lend
but banks something aren't lending because there's no reason to. Now at some point along
the line, the FED's going to have a huge problem. I don't know when that period is but you know
that money does started to filter its way in the economy and the Feds are going to have
to slam on the brakes. That in at that itself might cause a second recession when they do
that, when they try to react to what's coming down the line. But right now were, were, were
in this environment where boomers are heading into retirement with the thought that their
home was going to be their retirement and they'd stop--thought the stock market was
going to be the requirement and now they're finding, they're heading into retirement with
the underwater in their home where it's not worth as much as they thought it was and they
don't have enough money in their savings, excuse me in their stock plans to meet what
they plan to do during retirement. So were going to see bloomers heading into retirement
traveling less than they thought, buying fewer toys than they thought; cars, boats and the
like. So and in fact, some of them are solid cash draft. They're actually competing against
their kids and grand kids for jobs. Yes, these people, that thought they have money saved
up--they don't. They want--they need to supplement their income so they're looking for a job.
So where do they go, just look at the aged of some of the people at Target or in particular
at Walmart the graders. These people 62 years and older they're competing against their
kids and grandkids for jobs and the reason why Walmart hires them is for medical reasons.
People over 62 have Medicaid so the government rather hire them than someone who is 25 or
30 years old with kids and have to be able to manage their health care. So, you know,
we've got this competition for jobs, we've got boomers that they're going to start saving,
you know we're already seeing the savings rate start to go up and but the biggest thing
is consumer attitudes towards debt have changed. It's now cool to be frugal, to save money,
to not spend. People aren't flaunting their wealth like they used to. They're trying to
down play it, all of that you know brings about a completely different attitude and
that's what the FED is fighting here, it's attitudes. And attitudes are like supper tankers.
They don't turn around very easily at all and we've seen a consumers goes from the most
reckless over buying, willing to go in the debt over anything to an environment where
they're going to have to save. In this kind of environment, it's--it's very unlikely for
the FED to be able to spark serious inflation. So, you know, at some point we're going to
see it again but I don't think it's going to come rousing back and certainly all the
hyperinflations have been dead wrong about what's happening. And I believe they're still
going to be wrong because even when inflation does come back, it's--it's going to be this
big, massive inflation that everyone is expecting. The question is what would I do if it was--if
it was up to me? Because--what I would do, I would bring the troops home from Iraq. I
would bring the troops home from Afghanistan. The U.S. can no longer afford to be world's
police man. We're spending a lot of money overseas that's just totally wasted. Bombs
don't add the GDP. They subtract to it even though it looks like we're adding to it. Blowing
up Iraq did nothing but, you know, cause us to go and back in there, and we're trying
to fix it. That's causing this money. We've got troops state--stationed in Japan, Europe,
literally all over the world at tremendous expense. So I would believe--bring those troops
home, I would offer them first crack at any infrastructure jobs that we create. I don't
have a problem with repairing bridges or fixing pot holes. That's something that needs to
be done. So I would bring the troops home from Iraq, I would offer them first crack
at any of those jobs and I would just let--a lot of the rest of it just play out. The FED
has a history of making problems worse. Greenspan made this problem worse by trying to bailout
his banking buddies. So we can't do the same thing. There's a--we're going through a period
of adjustment and there's things that we can do, like I said, stop wasting money, fix tank--fix
pot holes, repair bridges, maybe do some other things. I think the best thing to do is actually
just let it play out. >> How would you compare the bank's situation
from U.S. bank compared to '90s banks or actually Japan and what would you do to fix the banks?
>> SHEDLOCK: The question is how would I compare the banking system today to that of the '90s
and Japan. Actually, I think we're following the same path of Japan and which is one of
the reasons why I don't have hope for a very strong recovery. Japan started building bridges
to nowhere not just fixing them but actually building that weren't needed. When you do
things that--when you spend money and waste where it's not needed, there's no economic
result, long-term lasting economic result--as, as result. The interest on the national debt
is going up and that's going to be--have to be paid for. Now either we pay for that or
we pay for that via chipping dollar or our kids, our grandkids start paying for that
down the road. So this situation is very much like what Japan went through. And anyone thinks
that the U.S. stock market is going to come roaring back, I had to look at how Japan's
stock market reacted. We're 20 years into this thing. 20 years ago, roughly Japanese
stock market was at 40,000. It's a--it's a 9 or 10, 000 today. So people in the United
States, you know, you might not think that that's going to happen and maybe it doesn't
but I'm saying that that can happen. And that would be along the lines actually of what
I expect for the next certainly five years. I don't think the stock market's going to
go anywhere. I could be wrong but for those people that are heavily invested, expecting
returns out of the stock market, I would say those returns are likely not coming. Here's
a question, in the past, you stated you see for deflation or recession in the U.S. unless
congress does something crazy. Do the recent actions in bailouts qualify? Well, it certainly
qualifies as crazy. But I don't think that they qualify as being enough to cause hyperinflation
as people think. And the reason is, you know, we've destroyed trillions, 10, $20 trillion
worth of wealth, real and imagined actually, in the housing environment. And for the reasons
that I outlined earlier, people aren't going to be spending, heading into their retirement,
they're going to be saving. And even what they do spend on is not going to stimulate
the economy much. Already we're seeing taxes go up. Take a look at California, there's
fees for everything now. They're putting in these traffic light things to, you know, to
catch people of, you know, they're trying to raise money by fining people. Well, you
know, all that just takes money out of consumer's pockets and puts it into the hands of the
bureaucrats which is the last place you want it. So, you know, none of that is going to,
you know, cause of any sort of productive, you know, capacity or anything that's going
to get us out of this funk. And I think the stock market's eventually going to reflect
that, which is why I don't think it's going to go anywhere. So yes, although our congress
has done something, you know, really crazy here, they've wasted a lot of money so far.
Anyway, it pales in comparison to the destruction of, of wealth and credit and the destruction
of credit that's yet to come. The--we're losing 600,000 jobs a months we have for the last
four months. I expect we're going to loss 600,000 jobs a month, all for the next four.
And then keep losing jobs after for quite some time. Well, people out of work are going
to--there's going to be more pressured on home prices, less spending that people are
going to do. So all of these reasons, I don't--I don't think that we're heading for this hyperinflation
that everyone thinks. How did you get to introduced Austrian Economics? Actually, I got introduced
to Austrian Economics back when I--in--when I was out of work. Looking at things, try
to figure out how the economy really worked versus what all the talking head and congress
and then Treasury Secretary Paulon was saying about how these things work. So Austrian Economics
is--yes, I--sound money, hands off, let the economy work its way out. And certainly, I
would agree to all of those things. We don't need the FED. The--right now they're talking
of having the super regulator or giving the fed even more powers. Bernanke two years ago,
didn't even thought this was contained and was not going to spread beyond sub-prime.
So, you know, how is it that the people who didn't see this coming and how was it that,
that Greenspan who created the biggest housing bubble the world has ever seen? How was it
that giving these guys more power is a good thing to do? I would be in favor of abolishing
the FED in fractional reserve lending. I'll take the question now here.
>> There is some indicator that the China economy rate is starting to recover, what
do you think? >> SHEDLOCK: I didn't understand the question.
Try again. >> That there is some indicator that the China
Economy is starting to recover. >> SHEDLOCK: Oh, will the--will the Chinese
Economy start to recover? Well, China has one advantage, if you consider this an advantage.
They are, in a lot of ways, less free market than we are. They still have a centralized
command economy. But if the government tells banks to lend, guess what? Those banks in
China are going to go out and lend. So, you're seeing some seeds of false hope now, I think,
in China where, you know, they're doing all this infrastructure probs. But think about
what China is really doing here. They're adding the capacity when we've got a wash in capacity.
We don't need anymore cars. We don't need anymore manufacturing [INDISTINCT]. The toy
business in China is devastated. The average--a doctor in China makes $20,000 a year. A doctor
would be relatively high class person China. Meanwhile, the condos that they're building
in Shanghai, all the big cities, these are gone for $600-700,000. Who can afford them?
They got a lot of empty condos sitting there in China. You've got a lot of stores, all
stuff with the same merchandise. You walk in to a store in some of these places and
there's 10 people. You know, you walk in to a Home Depot you can hardly--ooh, we got the
back mic back--walk in to a Home Depot here in the United States, you can--you can't find
someone to help you. You walk into a store in China and you might have 10 people all
trying to help you. So it's a big difference. And so anyway, so yes, China's trying to stimulate
your economy but the whole world is, but stimulate for what? Because I keep coming back. You
know, at some point--at some point, I think, you know, China is going to be the dominant
force in the world. Just as the U.K. passed the torch to the United States, I think somewhere
down the line, just on the bases of population, I think the U.S. might pass the torch to China.
But that's not anything that's going to happen in the next 10 years or even 20 or even 30.
But China, unlike the U.S., thinks in terms of decades so, you know, there'll willing
to go through some of this, there'll willing to do some of the things that they are doing,
with an eye down on the road. And in the United States, yes, we have a hard time looking down
the road. But, anyway, I think all these green chutes that people are talking about whether
it's China or the United States or Europe is really just more Malinvestments by government
throwing money at problems. And one has to ask, what happens when they stop throwing
money at problems? We slide back into recession, that's what. It's an artificial boom that's
being created right now and that's all we're saying worldwide on any recovers, we're saying,
whether China or the United States. This green chutes in my opinion are moorage.
>> If the banks are being responsible by not lending then what would be the driver of growth
in the economy? >> SHEDLOCK: Savings is always the driver
of growth in our economy. You can't spend what you don't have. In Austrian economic
terms, savings is what's left-over after production. Well, you--an apple grower produces 40 bushes
of apples and consumes two ore three. You know, the rest of that is savings. Now, he
can lend that to or use those apples to perhaps buy shoes or other things. And we need to
get back to that. Somehow, we've got this idea that we can just, you know, print money
out of thin air and that's going to stimulate anything, it doesn't. The only way you can
really get to lend is by people saving. It's the excess savings from production that feels
the economy. So, they've got it asked backwards. Anyone that says, "Well, we need to spend
money to get the economy going." No. We need to actually save money, have money saved up,
use that money for investment purposes so all the mainstream economist, including Krugman,
are just completely wrong in this point. >> The people in China [INDISTINCT] Chinese
people who actually stop buying U.S. treasuries [INDISTINCT]?
>> SHEDLOCK: The question is when will China stop buying U.S. treasuries? That's an interesting
question and most don't people really understand the situation. The answer is China must buy
U.S. Treasuries. And the reason is that United States is running a deficit. By definition,
if the United State is running a deficit, some other country in the must be running
a surplus. So, what are they doing with those? They're getting dollars in return. Somebody
will said, well, you know, why doesn't China buy--why doesn't China buy oil with those
dollars? Okay. So, China buys oil with the dollars and what does Saudi Arabia do with
the dollars? Those dollars are out there circulating around. Those dollars eventually have to come
home. And the way those--he way those dollars come home, is china buys U.S. assets. Right
now, it's U.S. treasuries. Now, we've seen Dubai try a port--try to buy a ports and they
were--they were turn down for security reasons but eventually, you know, China's going to
be buying U.S. businesses. That's how those dollars are going to return. But a long as
there's a deficit out there, people would say, "Oh, my god, China's going to dump treasuries."
By definition, they can't. And Mathematically, China or someone must be accumulating U.S.
dollars or U.S. dollar assets by the very nature of the fact that we are running trade
deficits with most of the rest of world. You are correct that it was spending in World
War II that more or less ended the great depression. But was it really the spending? I think people
are looking at correlation. And correlation and causation are not the same thing. Wars
are never a good thing. Wars are very destructive. What happened after World War ll is the world's
productivity--productive capacity was thoroughly trash. We--countries--Europe was obliterated.
The U.S. had the--had the only production capacity left in the world after world--Japan
was obliterated, Germany was obliterated, the U.K. was bombed. So we have our productive
economy. So, from our point of view, the economy boomed but look at what Japan went through.
Look at what Germany went through. Look at what the U.K. went through and ask yourself
if where was the good thing to them. It wasn't. So looking at that government's spending is
only looking at things from the point of view of the United States without ignoring what
happened to the productive capacity of the entire--rest of the world. So--but them, you
know, boomers came home. They started raising families, more kids, more growth, wanted toys,
the world economy eventually recovered. And I think that's the lesson here actually. The
economies will recover on their own accord if the government just gets out of the way.
The--by trying to stimulate the economy, we create false booms, we have this never ending
cycle of boom bust and I think the housing bubble actually was the bubble of last resort.
I'm hard press to think of another bubble that can come by, that would be a bigger than
that housing bubble that we just created. So, and you cease government spending and
you say, "Oh, my God. You know, look at this, the economy is humming." No. It only looks
like the economy is humming. Look at all the Malinvestments we created. We created Malinvestments
in housing, we created Malinvestments all across the line. When government spends money,
it creates a false economic signal that everything is well, that businesses go out there and
expand. And then, eventually, these things blow up. Under Austrian Economics, where we
would have some of the money, these Bomba Cycles like this would not occur. Now, we've
never had an environment where we've had a true, free market. We've--with no fractional
reserve lending. So, in fact, I wrote a blog on that today. So, you might want to read
that blog. And it's called the case against the Fed and Fractional Reserve Lending. It's
a lengthy pace so, go out there and read that. But history is actually replete with examples
of how government makes nearly every problem worse.
>> Let's take another... >> SHEDLOCK: Okay.
>> Yeah. >> SHELDOCK: Okay. I'll do this one. Another
question here on the computer, you've written, "Gold does well in deflation because gold
is money but gold hasn't been a medium exchange for decades." Why do you think gold will continue
to do well in this deflation? Well, I think gold is money because it acts like money.
We look at gold in comparison to all the rest of the commodities during this last crash.
Copper crashed, oil crashed, corn, everything across the board. The only one that didn't
crash is gold. I don't think that government decree alone can stop gold from being money.
Throughout history, people have kept gold--gold as money. And we're seeing that again here
right now. And in deflation, the value of currencies--the senior currency or the value
of gold should be expected to go up. And certainly it has. If you look at the price of gold actually
compared to copper or compared to the stock market so, you know, gold has soared from
200--250, excuse me, to over 900 where it's sitting now. And in the meanwhile, housing
prices have crashed, oil which was soaring and out-performing gold when we had an inflationary
kind of environment until everything crashed about a year ago now the amount of gold in
almost any other terms. Gold in terms of oil, gold in terms of copper, gold in terms of
house, gold in terms of stock market. Gold has done very well, which is what it normally
does in deflation and the great depression. Gold and gold miners were about the only winners
in the stock market. And--well, it's not the only winner today, it certainly held up. And
in deflationary periods, gold does well in real terms not nominal terms. And by real
terms, I mean in comparison to what gold can buy. I guess, like gold versus copper, gold
versus housing, gold versus stock market. So, gold does necessarily have to sort of
5000 or anything like that that, you know, some people are claiming. You know, I just
think this a good investment in this environment. Gold does well at times of credit stress.
Gold is not an inflation hedge at all in my opinion. The--certainly, we had inflation
from 1980, all the way to 2000. And gold fell from over 800 down to 250 and we had inflation
the entire length of time. So people that say, "Well, you know gold, you know does well
on inflation and gold does well in deflation actually are misfitting what's actually happens."
Gold does well at times of credit stress and when there's a boom on, there's--we got the
opposite of the credit stress and that's actually why gold collapsed in spite of having inflation
all the way from 1980 to 2000. >> Hi. So I have a question about the fractional
reserve FRB basically and it's actually not specific to FRB and I apologize I haven't
read your post this morning but I did read most of your post in the last few years. So
just to actually, kind of, clarify where I'm coming from, we actually agree in a lot of
things but I still have a very specific question about FRB. So I'm trying to send the objection.
Is there objection of something that is common to any sort of government involvement or if
for example FRB would be something that is completely clear? Meaning, a depositor will
have two options going to what, I guess, people refer to as money warehouse, where you know,
your money is stored there and they're just may actually have to pay for that storage
because it cannot be lend to somebody else. And some other people can go and put their
money in, you know, what currently existing bank. There's no FDIC or if there's FDIC,
it's more of a trade group than a government back insurance, it's just like any other insurance.
And would you--would you be okay with it? Because it's one of the issues that I find
really difficult to a lot of dogmatic Austrian economist and I would even just take it to
the next level. My problem would banning FRB is by extension you have to ban any form of
securitization, you have to ban any form of what people refer to as, you know, all the
innovation happening or financial engineering. And my last question, I'm sorry it just makes
it complicated, is did anybody considered the cause of banning any of these things because
to me the issue is what is the actual cause of boring or what kind of imbalance it would
create between the people that have money and the people who don't have money? And not
everybody who doesn't have money is actually at credit risk. A lot of people, you know,
want to buy a house, assuming they're going to make that money for the next 20 years and
not wait 20 years when they save all that money up to buy a house. And what does prevention
of FRB in any financial engineering does with that balance?
>> SHEDLOCK: Wow, there's a lot of questions there first off, let me say that fractional
reserve lending is fraudulent in of itself. And one of the reasons why prices keep going
up to the point where people can't afford to buy things is because they're fractional
reserve lending. Fractional reserve lending allows banks to lend out more money than they've
got. And not only that, Greenspan in 1994 authorized sweeps. Sweeps have checking accounts
unbeknownst to probably almost everyone. Money is swept out of checking accounts nightly.
The money you think is in your checking account isn't there. It's been swept out into a savings
deposit--savings account. Now, you don't see that but it's happening. The savings accounts
have no reserve requirements on them at all. So Greenspan allowed these sweeps to happen,
banks lend out that money and money isn't there. All that money, you know, goes into
fuel the price of assets until we have a crash like we just did. So the money fueled housing,
the money fueled stock market, the money fueled all sorts of other things. People thought
that it was wealthy and in contrast, you know, the question was saying, you know, well there's
you know not enough, you know they need to do this no, by lending money that they don't
have, the FED guarantees, until we have a crash like we did now, that there's constant
inflation. Inflation is theft actually. Inflation is theft against savers, it makes money that
the people are saving becoming increasingly become worth less and less over time. The--if
I--if I started a bank--not a bank. If I started a corporate--a company that let's say I took
in gold and started lending out gold and I lend out more gold than I had on, on deposit
by offering people receipts that they considered doing good for gold and I lend out ten times
more gold than I had. I think the government would probably crack down on me, but somehow
it's okay if banks do that very same thing. We have banks, you know, Le Man, Bear Stearns
that blew up, they were the leverage 40 to one. Now, while all that leverage is going
out there, the--it's helping to fuel asset prices. We see the reverse when asset prices
start having--when an asset price starts falling. You see banks that are under capitalize, they
have to raise capital and right now they're putting that burden on taxpayers right now
which is also wrong. But fractional reserve lending does not mean no lending. Fractional
reserve lending, it's fine, you know, if banks want to lend I have no problem with, with
banks, you know, lending out the money that they--that's on deposit. I have a problem
with the banks lending out 40 times more money that's on deposit that fuels asset prices,
that fuels this boom bust cycles that we went into.
>> I read your blog everyday I think it's great but unfortunately it don't matter, I
don't make any decisions, I don't feel the influence. How are you using sort of the popularity
of your blog in the--how do you feel about it all?
>> SHEDLOCK: The question is, how am I using the popularity of my blog to influence? Well
actually, you know, I don't have a lot of say either, unfortunately. But collectively,
I think we all do. And I think that change is going to have to come from all of us collectively.
When they were trying to pass that first tarp of plan last year, I organized a phone in,
fax in call in, write in campaign perhaps some of you here participated in it. But one
weekend, we filled up the voice mailbox of every legislator representative in the entire
congress. Their voice mail boxes were--were filled up. I think that President Bush and
Paulson were actually shocked when congress actually did not pass that bill the first
time. Of course, then Paulson comes out and promised us financial Armageddon if people
don't pass it, so it did pass two days later. And the stock market promptly crashed anyway
but I'm hoping to--in fact, I plan not hoping to--to start something up again. I've actually
promised to do that but I wanted to wait until some of the Obama glow has worn off. And when
the first hundred days, you know, everyone was willing to, you know, almost bow to the
administration. It was going to be very hard to, you know, step in and come in and say,
"You're doing this and it's wrong." You know, no one's going to want to listen to that.
I think the time is right now. We're starting to see some people, you know, question on
what authority the FED should have both Republicans and Democrats. It's going to be a long slug
but we're going to have to start somewhere and we're going to--we're all going to have
to get involved if we want to fix this problem. So look for, you know, some things on my blog
about more you know contacting the FED, members of congress, legislative representatives and
I think what would be really important is we could just get, you know, everyone interested
in this kind of thing to meet with their legislative representative one on one. You know, present
the case against the FED and try to get them interested. We need to abolish the FED, that's
one of the first things we need to do and certainly, that's going to take a massive
effort to get that to happen. But I think it's actually doable.
>> I think we're almost out of time. We have one--a few minutes for one more question.
Let's take a question from the internet and then if anyone who would like to join us after
this talk for lunch then feel free to. Okay. >> SHEDLOCK: I don't see another question
on here. I'll take one from the audience. >> Okay.
>> Have you considered using your prodigious voicemail bombing power for House Resolution
1207, the Federal Reserve Transparency Act? >> SHEDLOCK: Is, is that Ron Paulson's bill?
>> Yeah, I think it's Congressman Paul's bill. >> SHEDLOCK: Okay. Yes, I actually, I, I wanted
to do that. I mean, that's just a small step in the right direction. I think my, my, my
fear on, on passing that--are you talking about the audit of the, is that, is that--the
question is do I support the built to audit the FEDS. Certainly, that needs to be done,
but the FED really doesn't need to be audited, it needs to be eliminated. I've got a stack
of business cards over here, on the table over here. Anyone has a card or anyone who
wants a business card of mine please pick it up. My blog's not on there but reference
to Sitka Pacific Capital Management and a way to get hold of me, my email is on the