Macro Focus: The guest centers on the Federal Reserve's role in creating economic cycles, emphasizing limits of knowledge and the pitfalls of centralized monetary management.
Inflation: He argues the Fed is both arsonist and firefighter, highlighting compounding effects where 2-4% annual inflation erodes purchasing power dramatically over a lifetime.
US Dollar: The dollar is described as dominant global money with about half of Fed-issued notes circulating abroad, and stablecoins are said to inherit the dollar’s inflation risk.
Sound Money: He critiques the post-1971 fiat regime and advocates thinking about a stable currency where prices can go up and down around a flat long-term trend.
Housing Implications: Suppressed mortgage rates in the 2010s are cited as a key driver of today’s high house prices, creating affordability issues due to policy-driven distortions.
Fed Accountability: The Fed’s independence is challenged, with a view that it should be accountable to Congress and that inflation acts as a form of taxation.
Fed Financials: He notes the Fed’s recent operating losses and negative capital position, urging scrutiny of its balance sheet and PR-driven “Wizard of Oz” image.
No Stock Picks: No specific companies, sectors, or tradable ideas were pitched; the discussion focused on monetary regime risks and institutional reform.
Transcript
What does the Fed mean to you? Well, it means a lot to you. Uh, money is obviously intertwined with a lot that we do in our lives and the Fed is the producer of the monopoly US money and the dominant world money. Uh, we live in an age of an extremely large powerful and and intrusive state or government. uh the central bank in our case the Fed is one of the biggest supporters and sources of the power of the government. It's one of the biggest reasons the government can spend money when it's in deficit and keep on spending. Uh Professor Dgner discussed insightfully our inflationist days. What's the source of the inflation? It's the central banks. uh money printing and finally we also live through cycles and one of as as a great Austrian insight is one of the key elements in creating financial and economic cycles booms and busts is none other than the central bank. So uh we have plenty to talk about uh and I'm going to talk about it only briefly. But before I do, I didn't realize until I got here this morning that part of my assignment was to give you life advice until I heard my colleague speak. So, I have two points of life advice before we turn to the Fed. Uh point one and this has to do with thinking uh uh uh about as professor Brley said this morning well are the are all the problems of younger people today so-called generation Z unique or were there plenty of problems in the past well of course there were plenty of problems in the past and my first point of advice is beware of the egocentricity of the present the egoentricity of the present means the feeling that we all naturally have that somehow whatever we're doing is new and unprecedented uh and whatever ideas we have have never been thought before. Well, those are almost always wrong. And if we really want to understand things, we need to understand their history. Uh and this of course goes for ideas as well. uh a uh a related proposition to avoiding the egoentricity of the present is that those who fail to study the intellectual debates of the past are condemned to repeat them. So if you want to really make headway, you first have to study history. Among the free books over here is Rothbart, what has the government done to Our Money? Related to my talk, you ought to get this one and read it. And there's also this marvelous Hayek uh collection of selections Hayek for the 21st century and uh for understanding and the uh the ideas that he so successfully u uh explored and created. Hayek appeals to me because he was a philosopher as much as an economist. Um now that's my first life advice. My second life advice uh has to do with professor Dgner's speech and and about debt and only I put it this way. It's very simple idea. Spend less than you make. If you make a little, spend less than that. If you make a lot, spend less than that. It's perfectly possible to make a lot of money and spend more and run yourself into debt and bankruptcy. So this is a very simple idea. And if you spend less than you make, you will automatically be generating savings, and the savings will build year after year as your life goes on. All right, that's the end of my life advice, but I think they're both good points. Now, uh, before there was generation Z, um, as as Connor mentioned, there was 1971, which was the default by the United States under President Nixon on its obligations to redeem dollars for gold. And in in 1971, the world was transformed into what I call the Nixonian monetary world. And that Nixonian melon monetary world continues today uh 54 years later and is unquestioned except in some places like perhaps the Mises Institute and the Nixonian monetary world is a system of pure uh created paper money. It's e it's either printed up paper money or it's a mere accounting entry on the books of the Federal Reserve. Uh this is was an astonishing uh world first. Now this used to happen in war in wartime historically governments went to pure paper money but after the wars were over uh they went back to a sounder money. Um and uh that has not happened now for 50 years. But it doesn't mean we shouldn't keep thinking about what sound money would be and therefore we should think keep thinking about the Fed. Uh let me just mention when when it comes to paper money in terms of dollars, the Federal Reserve issues Federal Reserve notes are paper money. Do you know what a note is? What's the definition of a note? It's a promise to pay something. What does a Federal Reserve note promise to pay? Nothing except another piece of paper or another accounting entry. This is was a worldwide uh a worldwide revolution of the Nixonian world. uh there are about $2.3 trillion dollars of Federal Reserve paper money uh which about half interestingly circulates outside the country proving once again the Federal Reserve is not only the central bank to the United States but it's the central bank to the dollar using world which is the world the dollar using world they also use other currencies but the dollar is global all right now Everybody has heard of the Federal Reserve. Uh but nobody really knows very much about what the Federal Reserve really is and how it's constituted and how it works or doesn't work. So we're very quickly going to consider several perspectives on the Federal Reserve together. I call these the Federal Reserve as philosopher king, Federal Reserve as fire department, the Federal Reserve as arsonist, the Federal Reserve as constitutional problem, the Federal Reserve as 12 banks, and finally the Federal Reserve as the Wizard of Oz. Um, I should say at this point, if you feel inspired with a great question at any time, just put your hand up and I wouldn't mind stopping and we can we can talk about it uh at that point or or later afterwards if you uh if you like. Well, the Federal Reserve as philosopher king Federal Reserve Act uh was passed in December of 1913 of 1913 and at the time there were many predictions about how having this new Federal Reserve created will will mean that we'll never again have a financial crisis. There won't ever again be any more banking panics. There'll be no runs. There'll be no financial collapses. Well, of course, all these predictions were completely wrong uh because they assumed that the Federal Reserve would know enough uh about the financial future to be able to prevent the problems. Uh and that was wrong. Moreover, it didn't consider that the Federal Reserve might itself be active in creating the problems as it does. Uh, one of the problems most relevant to uh, you all at your age is the current extremely high price of houses. A high price of houses were importantly stoked and and increased and inflated by the Federal Reserve's uh, policy to suppress artificially mortgage rates to historically low and abnormal levels all during the 2010s. and thereby to put house prices up. When you push down the rates, you push up the prices. Uh and uh and the the unaffordable prices are are in some important measure uh a result of the uh overachievement of the Fed on its uh on its attempts and on its successful attempts to uh to manipulate the mortgage rates down to very low. Now can here's the this is the to be a philosopher king. This is the idea that somehow these guys in the Federal Reserve we can create a committee uh mostly composed of economists and this committee will meet in Washington and they'll figure out what has to be done to so-called manage the economy or manage the financial system. uh the theory of a philosopher king. I hope you I hope you do read Plato's Republic here know that to be a philosopher king you have to have superior knowledge. You have to be smarter and more more informed and know more than everybody else. Well, unfortunately that knowledge is not available. I mentioned again Hayek uh fund meases and Hayek developed the problem of knowledge which makes state management successful state management of economies impossible requires markets and the Fed is an good example of that. There is no way that the Fed can have the knowledge to manage the economy to to manage the financial system because no one can know what the financial and economic condition will be. Now, when we went through the David Gordon uh library a minute ago, my wife, who is happily here with me, pointed out one of his books, which is now here in the collection, and it was Journeying in Darkness. I thought this is perfect for my talk on the Fed. The Fed is up there journeying in darkness. Well, it is actually isn't quite darkness. It's really fog. It's not dark but it's gray and things are wrapped in fog. And actually uh chairman Powell captured this very well him himself in a talk recently. Uh one of the important concepts in um uh in economics is the natural rate of interest. Anybody know how you write in the natural rate of interest? It's small r asterisk and uh in economic formulas small r asterisk and then you pronounce it rst starred the natural rate of interest has a certain problem it can never be observed it's a purely theoretical idea a fine idea but it's purely theoretical and uh in in talking about this Paul brilliantly said in my opinion we're trying to navigate by the stars on on a cloudy night. Navigate by the stars we can't see. Very true. Well, that's a fundamental problem the Fed has. All right. I turn to the Fed as fire department. uh one of the the first line of the Federal Reserve Act of 1913 uh reads to to create Federal Reserve banks, I'm sorry, to establish Federal Reserve banks to provide an elastic currency. An elastic currency. That's why they were doing the Federal Reserve Banks. The first and most important reason, well, what does an elastic elastic currency mean? It's little oldfashioned, but it means that when you get in trouble, you can rush in and print up some more money and finance the crisis. This actually is okay as a crisis idea, but when the crisis is over, you have to stop and go back to normal. And the problem is that they never know when to stop. Just like they were still uh manipulating mortgage rates until 2022. um which was 14 years after the housing collapse of 2008 when they justified doing that. So um so that's the Fed as fire department. So when there's a fire, the Fed rushes in as fire department and uh and puts out the monetary fire by throwing on some more paper, but they need to stop when the fire is over. Well, James Grant has amusingly said, and it's quoted in the Mises uh movie on the Federal Reserve, if you ever seen it, the Fed is the world's leading financial fire department, but also the leading arsonist, the leading financial arsonist. So, they're both arsonist and fire department. And among the fires they rush in to put out are the fires they started themselves. So, what does that mean? That means the Fed is the source of inflation. and the inflationary they're always talking about fighting inflation well fighting the inflation that they created themselves so therefore arsonist as well as fire department I want to just uh share a little bit of math the fed has announced a as you know a 2% inflation targetingly announced as the Fed's target not the country's target good heavens how that happened. It is uh they've been they've been listening and they have they have I'm sorry and they're checking on me. Um so let's do a little math. Lifetime these days is about 80 years life expectancy. 80 years. So what happens if you have 2% inflation for a lifetime? What have prices done? Well, they've quintupled nearly, if not not quite five times. And what has happened to the purchasing power of a dollar in one lifetime at 2%. It's gone down to 20 cents. That's a 2%. Now, recently they've talked about 3%. I mean, inflation is 3%. Well, does 3% sound like a lot more than 2%? Well, maybe not. I mean, it's only 1%. In an 80year lifetime, at 3% the prices rise more than 10 times. It's just this is just compound interest math. But, you know, it always amazes us the power of compound interest. At a 3% inflation, the prices will be 10 times at the end of your life as they were when you arrived on the scene. And the purchasing value of the dollar will be 9 cents instead of a dollar. I mean this is astonishing math. Well, how about 4%. Do you really want to know? It's 23 times. So things that sound when you're talking about as percent rates of growth, this may be small and inflation turn into very large depreciation of the currency. And therefore as money intertwines in our life the depreciation of your wages, of your savings uh and um and in general uh the creation exactly as uh as funes or hayek would say of of maladjustments and mistakes in finance and economic. Now, uh I mentioned 1971 when President Nixon announced uh the uh closing of the gold uh redemption of the dollar. He said he had instructed the secretary of the Treasury temporarily temporarily to stop redeeming dollars for gold. Well, we know what the temporarily is. temporarily is at least until until now. So it's 54 years so far. Now uh that might uh lead us to the question of the Fed as a constitutional problem. Um um who under the Constitution of the United States, what part of the government is assigned the power to manage the money of the country? It's the Congress. It's a sole power and duty. While what the Constitution says is to coin money, we don't do so much of that anymore. Parenthetically, you know that American coins, which used to have silver in them, if you drop them on a table, they rang. They were sound money. They had a Now, what happens when you drop our coins on a on a table? They go clunk. Well, inflation, in my opinion, goes clunk in general. All right. So, here's the constitutional problem. the the Congress has the uh the sole power of money uh to coin money and to regulate its value. Regulating the value of money means either preserving its purchasing power or depreciating it as we were just talking about. Uh Congress also has another sole power taxation. Why is this relevant? Because inflation is taxation. Inflation is a way of taking the people's purchasing power and giving it to the government without having to bother passing any tax legislation. This is one reason why central banks are so handy to governments. The world is every every government now wants a central bank. Why? because they're so useful for taxing without having to legislate taxes. Uh and uh and that's coming back to what I said in the beginning, one of the important reasons why uh why the the central banks including the Fed are such a prop to the power of this of the government of our country and and of all all all countries. All right, let's uh so how do you manage I'm sorry the end of the constitutional problem is who is the Fed's boss? How to whom is the Fed accountable? The Fed likes to claim it's independent. That's nonsense. No part of a government gets to be a power on its own. At least not in a constitutional republic and certainly not in our constitutional republic. The answer is that it should be responsible to the Congress and we have a lot of work to do on that. Not by the way to the president to the Congress. All right. Uh think of the Federal Reserve as banks. Uh the Federal Reserve system has a board of governors and it has 12 Federal Reserve banks. Well, each of these banks is a bank. It has loans. It has deposits. It has investments. Uh it has capital or had capital past tense. Uh it's a bank has income expense and it is important and hardly anybody does it. I I remember um uh a talk a talk I had some years ago with a very prominent economist, very smart guy, and I said to him, "Well, if you look at the Federal Reserve's balance sheet," he said, "What do you mean?" I said, "Well, you know the Federal Reserve's balance sheet." He said, "Do they have one?" I Well, yes. If you look at the Federal Reserve's financial statements, which I do as a as a financial type, you discover that in the last three years, they have lost vast amounts of money. They're created to make money for the government. The Federal Reserve is structured to make money for the government from the government's monopoly of currency which it gives to the Federal Reserve but in fact they've lost. Now does anybody happen to know how much how are not you because we talked about this at lunch how much they how much they lost in the last three years. The well the answer is an interesting number. More than 240240 billion with a be dollars. This should be impossible but the Federal Reserve managed to do it. How much capital does the Federal Reserve have? Well, they [clears throat] had 46 billion dollar in capital. But you know if you've lost 240 billion and your capital was 46 billion. All right. This is a quiz, pop quiz. If your capital is 46 and you've lost 240, what's your capital now? Well, it's negative 194 billion. That that's astonishing actually to think about it. And if you think about the Fed as banks, which you they're also that uh you you see these things in their financial statements. And you may wish to study those. And if you'd like to read probably more than you really would like to read, you could read my papers on this on this topic. And finally, uh, the Fed is Wizard of Oz. What is Generation Z? Did you watch the Wizard of Oz movie when you were little? And you remember the wonderful scene in the end when they're finally confronted with the great Wizard of Oz and the little dog pulls the curtain back and it's revealed that it's all a fraud and the Wizard of Oz is just under there with his loudspeaker and his controls and what does he say? Pay no attention to that man behind the curtain. Well, the Federal Reserve is a magnificent I got to say no one in the world, in my opinion, is better at public relations and political relations than the Federal Reserve system. They really work hard on it and they're really great at it and they're like the Wizard of Oz. They have this and by the way and and they never admit they made a mistake. And so there's this kind of mythology that goes all together into the philosopher king, the grand manager of the economy, the all the all wise guiding uh power of the economy. It's all like the Wizard of Oz. Uh if you question it, they'll tell you pay no attention to the man behind the curtain. But in fact, here's my last advice. Pay a lot of attention to the man behind the curtain. Try to see what's really going on. come to the Federal Reserve and indeed uh all things institutional with with plenty of skepticism uh and wanting to really understand what's going on. And with that, if you have questions, I think we have a couple minutes. I could take them. >> Yes. Um, with the Genius Act and the Clarity Act being signed, do you see that that's power being uh moved? >> I do not. I do not. Well, Genius Act, as far as stable coins go, stable coins are part of the dollar system. You can't if you own the stable coin, you have a different way of making a payment, but the payment is still dollars. part of the world dollar system presided over by the Federal Reserve. And if the Federal Reserve inflates away the value of the dollar or depreciates the dollar, your stable coin goes down in exactly the and exactly the same amount. Uh so no um >> my question is um mentioned in wartime um the possibility of monetary expansion could potentially be a good thing. If you want to win the war, you got to pay the soldiers, >> right? Um, however, the problem is, >> but better is not to have the war if you can avoid it. >> Yeah. Yeah. But the problem is after wartime, the foundation to turn off the money, which is too great. So, what would be the alternative? you know, if we're not going to just get rid of the system because I don't think I don't think it's it's just going to be Congress already. >> You're correct. That is not not going to happen. And my own view is to is to reform the Fed in various ways. One of them is this. We have to distinguish really I want to come back to your point on prices. So uh historically what happened is that prices that during the war all governments most governments to including the United States uh through the Fed and uh in both world wars printed a lot of money created very high inflation historically uh let's say after the civil war or after the eur after the Napoleonic wars in Europe the prices then came back down. They they stopped the printing. So you can imagine a a a system in which on average prices move little, they go sideways, but in fact they go up and they go down. But one of the really interesting questions is why do we think that it's bad for prices to go down? We have currently now a a belief which some of my friends call inflation phobia. In fact, Joe Solerno, the the head of the intellectual work at Mises Institute, just gave a gave a talk on this a couple weeks ago, saying, "What's what's wrong with prices going down? Wouldn't you like to go to the grocery and have the prices go down?" Well, sure you would. And in a uh uh in an inflationist world, the rate of inflation might go down. So, ask yourself, when they say inflation goes down, what does that mean? And it means prices are rising at a somewhat slower rate, but they're still rising. So you have to distinguish in your mind between are prices stable over time, which would mean sometimes they have to go down because sometimes they are going to go up. Well, then do they also go down and they go back up and they go down and maybe trace more or less a flat line over time. that would be a stable currency or a stable value of money. Or are we in an inflationist world where prices always go up and the only question is are they going up faster or really a lot faster or somewhat less fast or somewhat slower but always rising. So the rate of change versus the level of prices and in the uh the aftermath of co I I remember a plaintive article in the Wall Street Journal by one of the one of the Fed sympathizing reporters saying,"Wh don't people see that inflation is going down?" To which my response was, "Because they see that prices are still going up. Inflation is down, but prices are up. So, we got to keep those those straight." And that's a fundamental issue in in defining the nature of a the nature of a monetary system. Okay, thank you all. Great to be here with you. [applause]
What Does the Fed Mean To You? | Alex Pollock
Summary
Transcript
What does the Fed mean to you? Well, it means a lot to you. Uh, money is obviously intertwined with a lot that we do in our lives and the Fed is the producer of the monopoly US money and the dominant world money. Uh, we live in an age of an extremely large powerful and and intrusive state or government. uh the central bank in our case the Fed is one of the biggest supporters and sources of the power of the government. It's one of the biggest reasons the government can spend money when it's in deficit and keep on spending. Uh Professor Dgner discussed insightfully our inflationist days. What's the source of the inflation? It's the central banks. uh money printing and finally we also live through cycles and one of as as a great Austrian insight is one of the key elements in creating financial and economic cycles booms and busts is none other than the central bank. So uh we have plenty to talk about uh and I'm going to talk about it only briefly. But before I do, I didn't realize until I got here this morning that part of my assignment was to give you life advice until I heard my colleague speak. So, I have two points of life advice before we turn to the Fed. Uh point one and this has to do with thinking uh uh uh about as professor Brley said this morning well are the are all the problems of younger people today so-called generation Z unique or were there plenty of problems in the past well of course there were plenty of problems in the past and my first point of advice is beware of the egocentricity of the present the egoentricity of the present means the feeling that we all naturally have that somehow whatever we're doing is new and unprecedented uh and whatever ideas we have have never been thought before. Well, those are almost always wrong. And if we really want to understand things, we need to understand their history. Uh and this of course goes for ideas as well. uh a uh a related proposition to avoiding the egoentricity of the present is that those who fail to study the intellectual debates of the past are condemned to repeat them. So if you want to really make headway, you first have to study history. Among the free books over here is Rothbart, what has the government done to Our Money? Related to my talk, you ought to get this one and read it. And there's also this marvelous Hayek uh collection of selections Hayek for the 21st century and uh for understanding and the uh the ideas that he so successfully u uh explored and created. Hayek appeals to me because he was a philosopher as much as an economist. Um now that's my first life advice. My second life advice uh has to do with professor Dgner's speech and and about debt and only I put it this way. It's very simple idea. Spend less than you make. If you make a little, spend less than that. If you make a lot, spend less than that. It's perfectly possible to make a lot of money and spend more and run yourself into debt and bankruptcy. So this is a very simple idea. And if you spend less than you make, you will automatically be generating savings, and the savings will build year after year as your life goes on. All right, that's the end of my life advice, but I think they're both good points. Now, uh, before there was generation Z, um, as as Connor mentioned, there was 1971, which was the default by the United States under President Nixon on its obligations to redeem dollars for gold. And in in 1971, the world was transformed into what I call the Nixonian monetary world. And that Nixonian melon monetary world continues today uh 54 years later and is unquestioned except in some places like perhaps the Mises Institute and the Nixonian monetary world is a system of pure uh created paper money. It's e it's either printed up paper money or it's a mere accounting entry on the books of the Federal Reserve. Uh this is was an astonishing uh world first. Now this used to happen in war in wartime historically governments went to pure paper money but after the wars were over uh they went back to a sounder money. Um and uh that has not happened now for 50 years. But it doesn't mean we shouldn't keep thinking about what sound money would be and therefore we should think keep thinking about the Fed. Uh let me just mention when when it comes to paper money in terms of dollars, the Federal Reserve issues Federal Reserve notes are paper money. Do you know what a note is? What's the definition of a note? It's a promise to pay something. What does a Federal Reserve note promise to pay? Nothing except another piece of paper or another accounting entry. This is was a worldwide uh a worldwide revolution of the Nixonian world. uh there are about $2.3 trillion dollars of Federal Reserve paper money uh which about half interestingly circulates outside the country proving once again the Federal Reserve is not only the central bank to the United States but it's the central bank to the dollar using world which is the world the dollar using world they also use other currencies but the dollar is global all right now Everybody has heard of the Federal Reserve. Uh but nobody really knows very much about what the Federal Reserve really is and how it's constituted and how it works or doesn't work. So we're very quickly going to consider several perspectives on the Federal Reserve together. I call these the Federal Reserve as philosopher king, Federal Reserve as fire department, the Federal Reserve as arsonist, the Federal Reserve as constitutional problem, the Federal Reserve as 12 banks, and finally the Federal Reserve as the Wizard of Oz. Um, I should say at this point, if you feel inspired with a great question at any time, just put your hand up and I wouldn't mind stopping and we can we can talk about it uh at that point or or later afterwards if you uh if you like. Well, the Federal Reserve as philosopher king Federal Reserve Act uh was passed in December of 1913 of 1913 and at the time there were many predictions about how having this new Federal Reserve created will will mean that we'll never again have a financial crisis. There won't ever again be any more banking panics. There'll be no runs. There'll be no financial collapses. Well, of course, all these predictions were completely wrong uh because they assumed that the Federal Reserve would know enough uh about the financial future to be able to prevent the problems. Uh and that was wrong. Moreover, it didn't consider that the Federal Reserve might itself be active in creating the problems as it does. Uh, one of the problems most relevant to uh, you all at your age is the current extremely high price of houses. A high price of houses were importantly stoked and and increased and inflated by the Federal Reserve's uh, policy to suppress artificially mortgage rates to historically low and abnormal levels all during the 2010s. and thereby to put house prices up. When you push down the rates, you push up the prices. Uh and uh and the the unaffordable prices are are in some important measure uh a result of the uh overachievement of the Fed on its uh on its attempts and on its successful attempts to uh to manipulate the mortgage rates down to very low. Now can here's the this is the to be a philosopher king. This is the idea that somehow these guys in the Federal Reserve we can create a committee uh mostly composed of economists and this committee will meet in Washington and they'll figure out what has to be done to so-called manage the economy or manage the financial system. uh the theory of a philosopher king. I hope you I hope you do read Plato's Republic here know that to be a philosopher king you have to have superior knowledge. You have to be smarter and more more informed and know more than everybody else. Well, unfortunately that knowledge is not available. I mentioned again Hayek uh fund meases and Hayek developed the problem of knowledge which makes state management successful state management of economies impossible requires markets and the Fed is an good example of that. There is no way that the Fed can have the knowledge to manage the economy to to manage the financial system because no one can know what the financial and economic condition will be. Now, when we went through the David Gordon uh library a minute ago, my wife, who is happily here with me, pointed out one of his books, which is now here in the collection, and it was Journeying in Darkness. I thought this is perfect for my talk on the Fed. The Fed is up there journeying in darkness. Well, it is actually isn't quite darkness. It's really fog. It's not dark but it's gray and things are wrapped in fog. And actually uh chairman Powell captured this very well him himself in a talk recently. Uh one of the important concepts in um uh in economics is the natural rate of interest. Anybody know how you write in the natural rate of interest? It's small r asterisk and uh in economic formulas small r asterisk and then you pronounce it rst starred the natural rate of interest has a certain problem it can never be observed it's a purely theoretical idea a fine idea but it's purely theoretical and uh in in talking about this Paul brilliantly said in my opinion we're trying to navigate by the stars on on a cloudy night. Navigate by the stars we can't see. Very true. Well, that's a fundamental problem the Fed has. All right. I turn to the Fed as fire department. uh one of the the first line of the Federal Reserve Act of 1913 uh reads to to create Federal Reserve banks, I'm sorry, to establish Federal Reserve banks to provide an elastic currency. An elastic currency. That's why they were doing the Federal Reserve Banks. The first and most important reason, well, what does an elastic elastic currency mean? It's little oldfashioned, but it means that when you get in trouble, you can rush in and print up some more money and finance the crisis. This actually is okay as a crisis idea, but when the crisis is over, you have to stop and go back to normal. And the problem is that they never know when to stop. Just like they were still uh manipulating mortgage rates until 2022. um which was 14 years after the housing collapse of 2008 when they justified doing that. So um so that's the Fed as fire department. So when there's a fire, the Fed rushes in as fire department and uh and puts out the monetary fire by throwing on some more paper, but they need to stop when the fire is over. Well, James Grant has amusingly said, and it's quoted in the Mises uh movie on the Federal Reserve, if you ever seen it, the Fed is the world's leading financial fire department, but also the leading arsonist, the leading financial arsonist. So, they're both arsonist and fire department. And among the fires they rush in to put out are the fires they started themselves. So, what does that mean? That means the Fed is the source of inflation. and the inflationary they're always talking about fighting inflation well fighting the inflation that they created themselves so therefore arsonist as well as fire department I want to just uh share a little bit of math the fed has announced a as you know a 2% inflation targetingly announced as the Fed's target not the country's target good heavens how that happened. It is uh they've been they've been listening and they have they have I'm sorry and they're checking on me. Um so let's do a little math. Lifetime these days is about 80 years life expectancy. 80 years. So what happens if you have 2% inflation for a lifetime? What have prices done? Well, they've quintupled nearly, if not not quite five times. And what has happened to the purchasing power of a dollar in one lifetime at 2%. It's gone down to 20 cents. That's a 2%. Now, recently they've talked about 3%. I mean, inflation is 3%. Well, does 3% sound like a lot more than 2%? Well, maybe not. I mean, it's only 1%. In an 80year lifetime, at 3% the prices rise more than 10 times. It's just this is just compound interest math. But, you know, it always amazes us the power of compound interest. At a 3% inflation, the prices will be 10 times at the end of your life as they were when you arrived on the scene. And the purchasing value of the dollar will be 9 cents instead of a dollar. I mean this is astonishing math. Well, how about 4%. Do you really want to know? It's 23 times. So things that sound when you're talking about as percent rates of growth, this may be small and inflation turn into very large depreciation of the currency. And therefore as money intertwines in our life the depreciation of your wages, of your savings uh and um and in general uh the creation exactly as uh as funes or hayek would say of of maladjustments and mistakes in finance and economic. Now, uh I mentioned 1971 when President Nixon announced uh the uh closing of the gold uh redemption of the dollar. He said he had instructed the secretary of the Treasury temporarily temporarily to stop redeeming dollars for gold. Well, we know what the temporarily is. temporarily is at least until until now. So it's 54 years so far. Now uh that might uh lead us to the question of the Fed as a constitutional problem. Um um who under the Constitution of the United States, what part of the government is assigned the power to manage the money of the country? It's the Congress. It's a sole power and duty. While what the Constitution says is to coin money, we don't do so much of that anymore. Parenthetically, you know that American coins, which used to have silver in them, if you drop them on a table, they rang. They were sound money. They had a Now, what happens when you drop our coins on a on a table? They go clunk. Well, inflation, in my opinion, goes clunk in general. All right. So, here's the constitutional problem. the the Congress has the uh the sole power of money uh to coin money and to regulate its value. Regulating the value of money means either preserving its purchasing power or depreciating it as we were just talking about. Uh Congress also has another sole power taxation. Why is this relevant? Because inflation is taxation. Inflation is a way of taking the people's purchasing power and giving it to the government without having to bother passing any tax legislation. This is one reason why central banks are so handy to governments. The world is every every government now wants a central bank. Why? because they're so useful for taxing without having to legislate taxes. Uh and uh and that's coming back to what I said in the beginning, one of the important reasons why uh why the the central banks including the Fed are such a prop to the power of this of the government of our country and and of all all all countries. All right, let's uh so how do you manage I'm sorry the end of the constitutional problem is who is the Fed's boss? How to whom is the Fed accountable? The Fed likes to claim it's independent. That's nonsense. No part of a government gets to be a power on its own. At least not in a constitutional republic and certainly not in our constitutional republic. The answer is that it should be responsible to the Congress and we have a lot of work to do on that. Not by the way to the president to the Congress. All right. Uh think of the Federal Reserve as banks. Uh the Federal Reserve system has a board of governors and it has 12 Federal Reserve banks. Well, each of these banks is a bank. It has loans. It has deposits. It has investments. Uh it has capital or had capital past tense. Uh it's a bank has income expense and it is important and hardly anybody does it. I I remember um uh a talk a talk I had some years ago with a very prominent economist, very smart guy, and I said to him, "Well, if you look at the Federal Reserve's balance sheet," he said, "What do you mean?" I said, "Well, you know the Federal Reserve's balance sheet." He said, "Do they have one?" I Well, yes. If you look at the Federal Reserve's financial statements, which I do as a as a financial type, you discover that in the last three years, they have lost vast amounts of money. They're created to make money for the government. The Federal Reserve is structured to make money for the government from the government's monopoly of currency which it gives to the Federal Reserve but in fact they've lost. Now does anybody happen to know how much how are not you because we talked about this at lunch how much they how much they lost in the last three years. The well the answer is an interesting number. More than 240240 billion with a be dollars. This should be impossible but the Federal Reserve managed to do it. How much capital does the Federal Reserve have? Well, they [clears throat] had 46 billion dollar in capital. But you know if you've lost 240 billion and your capital was 46 billion. All right. This is a quiz, pop quiz. If your capital is 46 and you've lost 240, what's your capital now? Well, it's negative 194 billion. That that's astonishing actually to think about it. And if you think about the Fed as banks, which you they're also that uh you you see these things in their financial statements. And you may wish to study those. And if you'd like to read probably more than you really would like to read, you could read my papers on this on this topic. And finally, uh, the Fed is Wizard of Oz. What is Generation Z? Did you watch the Wizard of Oz movie when you were little? And you remember the wonderful scene in the end when they're finally confronted with the great Wizard of Oz and the little dog pulls the curtain back and it's revealed that it's all a fraud and the Wizard of Oz is just under there with his loudspeaker and his controls and what does he say? Pay no attention to that man behind the curtain. Well, the Federal Reserve is a magnificent I got to say no one in the world, in my opinion, is better at public relations and political relations than the Federal Reserve system. They really work hard on it and they're really great at it and they're like the Wizard of Oz. They have this and by the way and and they never admit they made a mistake. And so there's this kind of mythology that goes all together into the philosopher king, the grand manager of the economy, the all the all wise guiding uh power of the economy. It's all like the Wizard of Oz. Uh if you question it, they'll tell you pay no attention to the man behind the curtain. But in fact, here's my last advice. Pay a lot of attention to the man behind the curtain. Try to see what's really going on. come to the Federal Reserve and indeed uh all things institutional with with plenty of skepticism uh and wanting to really understand what's going on. And with that, if you have questions, I think we have a couple minutes. I could take them. >> Yes. Um, with the Genius Act and the Clarity Act being signed, do you see that that's power being uh moved? >> I do not. I do not. Well, Genius Act, as far as stable coins go, stable coins are part of the dollar system. You can't if you own the stable coin, you have a different way of making a payment, but the payment is still dollars. part of the world dollar system presided over by the Federal Reserve. And if the Federal Reserve inflates away the value of the dollar or depreciates the dollar, your stable coin goes down in exactly the and exactly the same amount. Uh so no um >> my question is um mentioned in wartime um the possibility of monetary expansion could potentially be a good thing. If you want to win the war, you got to pay the soldiers, >> right? Um, however, the problem is, >> but better is not to have the war if you can avoid it. >> Yeah. Yeah. But the problem is after wartime, the foundation to turn off the money, which is too great. So, what would be the alternative? you know, if we're not going to just get rid of the system because I don't think I don't think it's it's just going to be Congress already. >> You're correct. That is not not going to happen. And my own view is to is to reform the Fed in various ways. One of them is this. We have to distinguish really I want to come back to your point on prices. So uh historically what happened is that prices that during the war all governments most governments to including the United States uh through the Fed and uh in both world wars printed a lot of money created very high inflation historically uh let's say after the civil war or after the eur after the Napoleonic wars in Europe the prices then came back down. They they stopped the printing. So you can imagine a a a system in which on average prices move little, they go sideways, but in fact they go up and they go down. But one of the really interesting questions is why do we think that it's bad for prices to go down? We have currently now a a belief which some of my friends call inflation phobia. In fact, Joe Solerno, the the head of the intellectual work at Mises Institute, just gave a gave a talk on this a couple weeks ago, saying, "What's what's wrong with prices going down? Wouldn't you like to go to the grocery and have the prices go down?" Well, sure you would. And in a uh uh in an inflationist world, the rate of inflation might go down. So, ask yourself, when they say inflation goes down, what does that mean? And it means prices are rising at a somewhat slower rate, but they're still rising. So you have to distinguish in your mind between are prices stable over time, which would mean sometimes they have to go down because sometimes they are going to go up. Well, then do they also go down and they go back up and they go down and maybe trace more or less a flat line over time. that would be a stable currency or a stable value of money. Or are we in an inflationist world where prices always go up and the only question is are they going up faster or really a lot faster or somewhat less fast or somewhat slower but always rising. So the rate of change versus the level of prices and in the uh the aftermath of co I I remember a plaintive article in the Wall Street Journal by one of the one of the Fed sympathizing reporters saying,"Wh don't people see that inflation is going down?" To which my response was, "Because they see that prices are still going up. Inflation is down, but prices are up. So, we got to keep those those straight." And that's a fundamental issue in in defining the nature of a the nature of a monetary system. Okay, thank you all. Great to be here with you. [applause]