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Dec. 30, 2008 - Rush Limbaugh Program
36:32
December 30, 2008, Tuesday, Hour #1
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Welcome to today's edition of The Rush 24-7 podcast.
I gotta say this is a little bit odd.
I mean, it really is.
I I got my stack of stuff here from Kit, uh, you know, working tirelessly all last night, no play, just work.
I got my stack of stuff here ready to go, perusing through it from the producer extraordinaire, Kit Carson, and almost every page has something to do with remedies for hangovers.
I I I'm confused here.
What's did somebody get an early start or something?
I I'm I'm I was wondering who that guy was in Times Square last night going, pssst buddy, got a quarter.
Very, very strange night in New York City.
Hello, once again, everybody.
If there are technical difficulties going forward, trust me, folks, it's Kit and Mike cutting off my mic after that.
I I look, I enjoy I enjoy an adult beverage uh just like anybody else.
I can remember when my mom used to come over to my place when I was uh batching it, and she'd say, Jason, you got to cut back, and I'd say, I have cut back.
She says, What about all those empty bottles in the closet?
I never drank an empty bottle in my life, I tell her.
That didn't work.
Hi, everybody, good Tuesday afternoon or morning, depending on where you are, or depending on how you feel.
It is the Rush Limbaugh program.
Once again, 1-800-282-2882, my pleasure, my privilege to uh sit in for El Rushbow as he takes a couple of well-deserved days off.
We've got a stellar lineup of fill-ins.
Walter Williams comes back tomorrow, so stay tuned to the EIB for that, as well as Mark Stein on Friday, best of rush on Thursday, then the big day.
Monday, L. Rushbo is back in two thousand and nine tip top shape.
We can hardly wait for that.
Well, let's see what's going on here.
Another day, another bailout that really doesn't narrow it down much.
Have you heard about this?
Now, the Treasury Department.
Well, let me put it to you this way.
GMAC, remember the General Motors financing arm so you can uh, you know, get a loan for your car and they make a lot of money, is now a bank.
In fact, come to think of it, that little coffee shop down on Avenue of the Americas, not far from where you guys are, that's now a bank as well.
In fact, everything's a bank.
And you want to know why this is happening?
You want to know why so many people are becoming banks?
You want to know why there's no such thing as Wall Street anymore?
Wall Street was a non deposit taking financial institution.
They're gone.
Almost every financial institution is now a bank holding company.
And there are two reasons why, actually, two words why.
Easy money.
You see, the Fed is supposedly the lender of last resort for the banks.
Now they've become the lender of first resort for everyone and everything.
And in effect, they're saying, by God, if you won't make loans out there, we, the government, will.
And they have now decided to inject five billion dollars along with the Treasury Department into GMAC, the automobile financing company.
This will convert them into a bank holding company eligible to get money from the Federal Reserve after the Treasury $5 billion bailout for GMAC.
You ever get the feeling that the Federal Government is trying to do for the automobile companies what they did for housing?
Overbuild, overbuild and build things people cannot afford and eventually don't want.
That's what's happening in the housing market.
That's the epicenter.
The genesis of this current crisis is we had an asset bubble in housing.
We overbuilt it.
So naturally, the market says, well, you need to get supply and demand in equilibrium.
You need to let prices fall, or housing, quite frankly, the housing stock needs to diminish until it is even with demand.
Uh-huh.
But we have governments.
Remember, this is not a failure of markets.
The market correction is um the marketplace working.
Oh, I love people who think that the market should never correct.
A market correction is what free markets do.
That's part of the beauty of free markets.
They automatically correct themselves unless the government intervenes.
And the government, instead of letting housing correct, is trying to prop up housing, keep the bubble going.
Sooner or later it will burst again, and we'll be right back where we started from.
More on that in a moment as housing prices plunge 25% from a year ago.
We'll get to that in a second.
But GMAC converting itself into a bank.
Now, remember, the Federal Reserve has created what?
Um about a trillion and a half dollars, I do believe, in the last Couple of months in fiat money.
And this is a crucial thing for you to understand.
I know a lot of people, their eyes glaze over when you talk about monetary policy, but monetary policy is, you know, th if you want to look at economic dislocation, you can usually find a central banker someplace.
Because if you di it's it's the easiest thing for government to do to destroy the currency.
You don't have to borrow, you don't have to raise taxes.
All you do is turn on the printing press of the Federal Reserve, and they start buying up your treasury bills, and now the Federal Reserve, their open money operation, is buying up anything.
Mortgage-backed securities, GMAC securities.
They are becoming the lender of first resort.
So what we have now is the specter of the Federal Reserve's balance sheet going from under one trillion dollars in August of this year to two, over two trillion now, actually well over two trillion, probably two point three or or four trillion.
That is money that the Fed has put into the economy by buying bonds.
It used to be they would just buy and sell treasury bills on the open market.
They want to expand the money supply, they'd buy treasury bills.
They want to contract the money supply, which is what they should have been doing after the asset bubble of housing, they would sell T bills.
And when they sell T bills, you give them your money.
That contracts the money supply.
It it keeps inflation down and restores equilibrium.
Instead, we just caught out of an inflation-induced asset bubble in housing.
So what is the Fed doing?
They're reinflating.
And the only defense they've got is some sort of of Krugman-esque, well, we've got a liquidity trap and deflation's happening.
Folks, there isn't anything wrong with mild deflation.
Deflation is good.
Have you looked at gasoline prices lately?
Have you looked at your heating bills lately?
This is the great untold story.
We've got a wonderful, a wonderful tax cut going to all of you in the form of the market correcting the commodity bubble that was known as the price of oil.
That is a good thing.
And it ought to apply to housing as well.
But no, we can't let that happen.
We're the government and we're going to intervene to prop up this this asset.
And now they're intervening to prop up GMAC and prop up Detroit, even though the UAW is giving nothing back.
Hell no, we won't go.
No concessions whatsoever.
By God, we've helped to drive this c these companies into the ground and we're not resting until they are buried.
Well, you know, this obviously is unsustainable.
Absolutely unsustainable.
You cannot keep going down this road of turning every company on every street corner into a bank and then pumping them full of cash.
Because sooner or later that cash is going to bid up a declining supply of goods and services, and that's called hyperinflation.
And that is going to happen, even though it's not happening now because of an economic downturn, all of that money has got to go someplace.
The Fed will not snatch the punch bowl once the economy starts to heat up.
They will not reduce the money supply then.
You're going to have trillions of extra dollars chasing.
Think of it this way.
Let's say the economy is made up of oh, I don't know, uh ten shirts, ten loaves of bread, and ten pairs of shoes.
Those are all the things we produce.
And you've got thirty products that we produce in a given year.
All right?
And we've got ninety bucks in circulation.
Each of those products is going to go for three dollars.
The money will match the goods and services.
Now all of a sudden you increase the money supply tenfold.
Have you increased the shoes or the shirts or the bread?
No.
You just increase the money supply.
All that's going to happen is the price of each one of those things is going to go up tenfold.
They're going to be thirty instead of three.
Is anybody wealthier?
No.
In fact, you're less wealthy if you don't get the money, the new money that's created initially, and you don't do it.
Usually the banks get the money first.
The people who get the money first can buy the products at the lower price, but by the time it filters through the economy, you haven't gotten a raise, and inflation wipes out your savings, wipes out your income.
It is the most insidious form of government taxation.
And I'm telling you, we have never increased the supply of money by by effectively nationalizing the banks, becoming the lender of first resort, buying mortgage-backed securities, buying anything that anybody wants to give the Federal Reserve.
We've never done this to this degree before.
History is replete with these examples.
The Weimar Republic, Jimmy Carter's era, when we had 13.5% inflation and 21 and a half percent prime interest rates.
I I uh I would be very surprised if that doesn't happen.
Now I don't think it's going to happen soon, because we are stuck in this malaise.
But as soon as things turn around, and they will, as we were talking about yesterday, we've been through much worse.
You're going to have all of this excess capital out there.
It's not really even capital.
It's excess fiat paper money out there chasing another asset.
To understand the genesis of our problems, you've got to understand we've had three asset bubbles in the last decade.
The tech stock bubble that burst after 9-11, actually burst before that in 2000.
That was bit up by by people having more money than they knew what to do with, so they bought tech stocks.
And you had this psychology that ran up the price.
That burst.
Then we had the housing bubble.
They had more credit than banks could lend out.
They had to find something, so they kept lending out to people.
It helped that the government went in there and told them to make bad loans.
It also helped that the government with Fannie and Freddie said, Oh, by the way, don't worry about making the bad loans.
We'll bail you out.
So we we gave everybody who wanted one a loan for a house.
We bit up the price of housing.
And then that burst in 2006.
We had the commodity bubble.
We had oil that supposedly was going to what?
$200 a barrel, $150 a barrel, I think it got close to that.
That bubble burst.
It's not bad when bubbles burst if you let them burst and then you recalibrate and get the equilibrium set again.
And instead of doing that, the Federal Government, through the Treasury Department, through the Federal Reserve, is panicking.
And they're trying to keep the bubbles going, and they are unsustainable.
That, my friends, is a crisis caused by government.
This crisis was caused by government and it's going to be exacerbated by government.
You've got you've got business out there that is simply doesn't know what to do.
A recession of uncertainty because they don't know what the government is going to do next.
They don't know who's going to get the next bailout.
They don't know whose balance sheet is healthy or whose isn't because people are not allowed to fail.
That is a recession of paralysis.
That's why we can't get out of this.
And now with housing prices, housing prices plunged again in October.
Let's see, the rate of a year-over-year decline, a record high 19%.
The peak to trough now is 25%.
Now the Obama administration is saying, well, we're gonna we're gonna forget about bailing out companies, except ones that have big unions.
We're going to go right to the housing problem.
We're gonna use the FDIC or we're going to use anything we can to literally lift home sales.
We can't let these home prices fall any further.
Excuse me, that is the only way out from under this mess.
If you go in there and start start modifying loans, which is what the FDIC had a plan to do, what the Treasury was planning to do to push down interest rates.
Treasury, by the way, is also buying, as is the Federal Reserve, Fannie Mae and Freddie Mac bonds, trying to keep those mortgage rates low to keep the price of housing up.
I mean, i.e., if mortgage rates are low, people can afford to get a mortgage, therefore they can bid up the price of the existing stock of homes.
But folks, this is insane.
Uh first of all, even when you modify loans, about fifty-eight percent of the people who have their loan modified end up in default later, six months later anyway, according to the Comptroller of the Currency.
Uh the the eight months after the refinancing or the modified loan, fifty-eight percent of modified loans go into default anyway.
But above and beyond that, and the most important thing we've got to remember is we've got to let housing hit its natural bottom.
I I own a house.
My the value of my house is is much less than it was when I bought it.
I know that, but I'm not going anywhere.
Think about this.
If we start giving away mortgages or modifying mortgages and telling lenders contracts don't mean a thing, that's the end of the rule of law, and we start or telling people who are behind or telling people who invested and invested wrong, we're gonna modify your mortgage, your principal and interest payments are going down.
What does that say to you?
You, the responsible American who did who played by the rules and did things right.
It says the government thinks you're a chump.
Once the housing prices continue to fall, and why don't we just do it in a hurry and get it over with and reach their natural bottom, we will start to buy houses again.
The price will hit its natural bottom, and people will say, Hey, that's a good investment.
Let's start buying again.
There is no way you can stop market forces.
And when the government tries to do that, it creates more problems than it solves.
It's called Fannie Mae and Freddie Mack.
I'm Jason Lewis in for El Rushboat today on the excellence in broadcasting network.
Yes, sir.
Oh boy, this just in, apparently Illinois Governor Rod Blagevich, should we say governor for now, is expected shortly to announce Illinois Attorney General Roland Burris, 71 year old for former attorney general, excuse me, former attorney general Roland Burris, seventy-one years old, to replace uh President elect Barack Obama in the U.S. Senate.
A former attorney general who's seventy-one.
I guess they get it better get moving on that impeachment thing.
The good news out of Illinois is the Lieutenant Governor has said, if in fact Blagoevich is impeached, uh he will support a special election, which is the only way uh for uh the folks in Illinois to f to even feel as though they've had a real say.
Because the whole Illinois machine is so tainted to allow anybody, even if they re replace Blogoevich to appoint another well, Crony uh is not going to serve the public.
Let's have a special election in Illinois and see who the next uh Senator from that state is going to be.
Anyway, to the phones we go 1-800-282-2882.
I'm Jason Lewis, in for Rush Lumbaugh, Kurt in Chicago, speak of the devil, you are on the excellence.
Kurt is gone.
Well, obviously he's uh in the running too for the uh Senate seat.
Let's try Dale in Columbus, Ohio.
You're on EIB.
Hi.
Hi, Jason.
Yeah, I wanted to talk to you briefly about the uh our situation with the creation of money and the Fed and the mint and the Treasury.
Right.
Uh you mentioned early on, and I don't I don't know whether you know you were it it went by kind of fast, but you said in the with all this bailout money that's being created that we're uh uh uh I thought you said we're not creating any debt, but we're creating uh you know huge debt and a huge amount of interest to the bigger.
Well, you gotta understand.
No, no, you've got to understand.
There's two aspects to to this economic policy and any economic policy.
There's fiscal policy, which is tax spend and borrow, and there's monetary policy.
You're right.
If in fact the government floats debt, they they float treasury bills, that is not inflationary uh in in and of itself.
When the Federal Reserve, however, decides to merely buy Treasury bills from the from the government and put a credit on the government's check uh banking account, that is inflationary, assuming velocity is constant.
Okay.
Well, the the part of that, I guess that I'm confused about is that in other words, they're not uh where is the Fed getting the money to buy the these treasury bills from the Treasury.
That's that's the point of the whole exercise.
They're creating it out of thin air.
Right.
They're creating ciphers on a computer.
That's right.
That's right.
It's just the that's where they're getting the dollars.
Normally, because normally when they put cash into the Federal Reserve system, uh they the mint prints the money, then they they uh put the money into the Federal Reserve System by selling, in essence, selling uh uh T bills and bonds.
And they're not doing it that uh this way.
No, no, no.
The the the mint primarily, their main objective is to keep literally physically enough money out there to do business.
Right.
You're you're right.
What what the Fed does are are computer entries and putting a credit or a debit on somebody's account.
But normally what the the Federal Reserve's got three mechanisms with which they can expand the money supply.
They can adjust the reserve ratio and reserve requirement, they can adjust the discount window or the discount rate, or what they usually do is through operations through the Federal Open Market Committee, and they keep an inventory of treasury obligations, usually treasury bills, and so do do the money center center banks out there, and they buy or sell treasury bills on the open market to try to peg the federal funds rate, either creating money or contracting the money supply.
That that is money that is literally created.
Right, I understand that.
Uh is this the reason that the Founding Fathers uh said we shouldn't have a central bank, i.e.
the Federal Reserve and and the the our uh we had to amend the Constitution and allow it uh in order to allow it to happen.
Well, the framers didn't specifically say no Federal Reserve, especially with Ben Burnett.
No, they said no central central bank.
They were they were very very concerned about sound money.
And if people look at American history up until nineteen thirteen, actually throughout the ups and downs of the nineteenth century, the gold bug say we had sound currency and it was a good a good period, we didn't have hyperinflation.
Now that's not to say the Federal Reserve could not work.
The problem in my view is that that pol politics interferes.
That if in fact the Federal Reserve creates money in a downturn when velocity is low, and they promise to restrict the money supply when the economy turns up, theoretically you could you could in fact you know stabilize the economy.
The problem is they never snatch the punch bowl.
They keep the money going for political reasons.
Look at it this way, folks.
It could be mur uh worse.
Could be much worse.
Al Franken could actually win the recount in Minnesota.
So no matter how bad things get, they can always go downhill from there.
Comforting, isn't it?
1-800-282-2882.
I'm Jason Lewis with Talent on Loan from Rush, having a great time on the Excellence and Broadcasting Network.
Hope you're enjoying it too.
Let's go to Patrick in Richmond, Virginia.
You are up next on the Excellence and Broadcasting Network.
Great.
How are you doing, Jason?
Fine, Patrick.
How are you?
I'm doing good.
Uh you're off on a couple premises uh with your economic theories.
I just wanted to point them out.
Well, I'm glad you could do that for me.
Do I get a bill later or no, no, this is a preview.
This is a freebie.
Okay, all right.
All right.
Well, you know, the the idea that we're not going to manipulate the economy to to our best interest is just I think that's just foolish.
Yeah, yeah.
Yeah, it works so well in eastern Europe.
I think we ought to try it here.
Well, uh, it's worked pretty well in the last two decades.
No, it hasn't.
You don't think so?
Do you think anything about Reaganomics was manipulating the economy?
Anything about Reaganomics was manipulating the economy?
Where where do you think this up until this particular downturn brought to you by your friends in Washington fine-tuning the housing market?
Where do you think the recovery and the growth came from?
It came from the tax cuts of nineteen eighty-one.
It came from tax tax reform in nineteen eighty-six.
We were in the last legs of the Reagan Revolution, which said, let's not try to fine-tune the economy, Patrick.
No, now you're changing now you're changing the subject.
The the Reagan economics program was about spending.
It was about military spending, and that's fiscal policy.
The Reagan fiscal policy of spending money on military is what caused the quote Reagan revolution.
God, what where do you get your economics from?
Paul Samuelson?
Paul Krugman?
I get my economics from St. John's University in Minnesota.
Where do you get your real well that's where I got I didn't get my master's degree there?
But if you want to compare pedigrees, we can do that all day long.
It's kind of silly, though.
Uh let me tell you something, pal.
Uh the the the fact the fact is you're spewing out pure Keynesian economics.
The Reagan, the Reagan policy was anti-Keynesian.
Even Keynes admitted that if you spend your way out of a recession, you will get inflation.
Reagan was anti-inflationary.
It was cuts on the margin for savers, not for spenders.
Get it straight, Patrick.
No, Paul Volker already got it straight.
Yeah, Paul Volcker did the opposite of what this Federal Reserve is doing in 1981 and 1982.
He raised interest rates, he allowed them to go up.
We got rid of the malinvestment, we got rid of inflation, and then we had recovery.
He put on the brakes and and had unemployment approaching ten percent, had stagflation, interest rates at twenty-one percent.
There's a better way to manage it.
And that's what's happening is the problem is the paradigm of our economy is changing.
And people like you aren't recognizing that.
And you want to continue with the same old and it's not working.
There are several different sectors in our economy, and you keep looking at the GDP.
Why are you such an apologist for government?
I'm not an apologist for government, but I'm not sure.
Well everything everything you've said has been an excuse for government intervention.
The paradigm is changing.
The economy is different.
Well, tell me what about markets changes over time.
Well, let me tell you something about markets that you don't understand.
Yeah, right.
Yeah, right.
Free markets uh aren't aren't the end all answer.
Free markets don't provide clean water.
Free markets don't provide safe workplaces.
Free market don't provide clean air.
Actually, a actually they do, and combined with the common law, they work just fine.
Government regulation is what screws things up.
If you go back to our common law history.
If I was polluting a stream and downstream it polluted your stream, you had a common law cause of action.
I'm all for courts imposing that.
I'm all for courts uh uh, you know, upholding private property.
That has nothing to do with the current economic problems, that has nothing to do with fiat money, that has nothing to do with overspending.
No, and overspending, you have to get to here's here's the crux of the uh the where you're where your economics break down.
In order for overspending to cause inflation, you have to be at or near full employment.
And we're nowhere near that.
We're s my friend, spending or fiscal policy, as I said, is not necessarily inflationary.
When you create money out of thin air over time, that is.
Now you can you can argue with Milton Friedman all day long, but when it comes to Patrick in Virginia or the late great Milton Friedman, I think I'll go with Milty.
Yeah, well, when I had my discussions with Milton Friedman, uh he he's the one who pointed out to me that Patrick, when you when it's all said and done, whether it's whether it's a monetary policy or a Keynesian policy, the both of them get down to the point where you're putting cash injections into the economy.
He says they're just different models of the same thing.
Well, that's not what Milton Friedman, that's not what he professed, because if in fact you're putting cash injections into the economy from a fiscal standpoint, the money comes from somewhere.
You either borrow it or you tax it.
So whatever you put in has already been taken out.
Patrick, you know what?
You know what?
I you might want to go back to St. John's and ask for part of that money back, but thanks for the call.
1800, 282-2882, the contact line here in the Rush Limbaugh program in Baltimore.
John, you're up next.
Hi and welcome.
Hey, Jason, isn't isn't this uh government bailout of the housing, isn't this just a way of propping up the states because uh it keeps the property taxes up?
Well, it could be.
The states are asking for their own fiscal stimulus now, you know.
They want to get bailed out.
California wants to get bailed out.
Uh every state is now on board with the fiscal stimulus because they can't manage their own their own money.
But it it's funny, property taxes, the revenue there doesn't fall immediately.
There's usually a lag from twelve months to sixteen months by the time your appraised value goes down and finally seeing property taxes go down, and even then they'll just raise the mill rate on you.
So government government is not going to suffer.
And then that's that's the fundamental problem here.
While the private economy contracts, can we not expect at some point government to contract?
Now now, Patrick will throw out all of these shibboleths about fine-tuning, priming the pump, all of the the the nonsense that has been totally, totally discredited, going back to to Milton Friedman, quite frankly, or anybody else, or Art Laffer or John Lott or anybody, uh the the but but what you've got to understand what it really means is we've got to come up with some excuse for government.
I mean, even the Bush administration spent one point one trillion dollars more in the last eight years than what they inherited.
If that isn't a Keynesian fiscal stimulus, I don't know what is, but now we're in this recession.
So I guess the fine-tuning and government spending really doesn't work.
John, interesting point.
Thanks for the call of Brenda in Indiana.
You're up next on the Rush Limbaugh program.
Hi.
Hi, Jason, how are you doing?
I'm doing fine.
How are you?
Uh okay, I guess.
Um what I was uh gonna ask you is given what you're saying, which makes perfect sense to me, you can't spend your way into into uh wealth.
Uh you have to save for it.
I mean, I'm old fashioned.
I'm a little town in Indiana, raised in the country, you know, common sense pi uh places.
But given that, when you got a little bit in your 401k, how where you put it to keep from losing all of its value.
Well, th that's an interesting point, because right now people are so afraid, thanks to the government panicking, that they're buying negative interest treasury bonds.
They're buying treasuries at zero percent.
People are people are saying, I don't care if I don't even get back my principal, I just don't want to lose anymore.
And that's how the government's able to borrow so much right now.
Sooner or later, people are going to wise up and say, I'm not going to invest in a government that may or may not have the capacity to pay me back when they're when you're looking at trillions upon trillions of dollars of deficits.
More more importantly than that, they're going to look for better investments over time.
And when they do, when they do, that's when the day of reckoning will come, because then the government will have to raise interest rates or or uh uh raise taxes, which both which will kill the economy.
You your your first point is an excellent one, though, Brenda, And that is look, what you're doing in your particular financial situation is in fact precisely what we need to do collectively, and that is if you've made a bad investment, if you've thrown good money after bad, you end up saying, okay, I'm not going to do that anymore.
I'm going to have to pay down the debt I've got on this wordless investment.
I'm going to have to suck it up for a while and d-leverage, right?
Isn't that what you do?
Yeah.
Well, the liberals say, and this goes back to the I'm certain the textbook that Patrick was studying under when he was in college, they say, well, there's a fallacy of composition here.
That what's good for the individual really isn't good for the country.
So instead of paying down our debt, instead of contracting government, we really need to do the opposite.
Well of course that's just silly.
You'd have to be part of the intelligentsia to believe that.
What the government needs to do is deleverage is to spend less, cut taxes at the margin, and and pay off this malinvestment that they have as well.
We we all need to go through this.
There's no way to get out from under this downturn.
But the question is are we going to drag it out by having the government try to keep up an artificial bubble in the name of smoothing things out?
Are we going to take our medicine, get it done, get it over with, and move on?
I say I say we ought to do the latter.
And by the way, we are going to do that.
It's just a question of length.
I mean you cannot trump markets, no matter how long you've served in governments.
I'm Jason Lewis on the Rush Limbaugh program.
Don't go away because more of your calls coming when we return.
Greetings once again conversationalists across the fruited plain.
I am Jason Lewis with talent on loan from El Rushbow, having as always more fun than a human being should be allowed sitting in for the big guy.
He'll be back on Monday.
Stay tuned for that but right now let's go to Las Cruces, New Mexico.
Jeff, thanks for waiting.
You are on the Rush Limbaugh program with me, Jason Lewis.
Hi.
Hi, Jason.
Thanks for taking my call.
Glad to do it, sir.
Kind of surprised to get through to you.
But anyway, um regarding your conversation about the Fed printing money and creating money out of thin blue air.
Yes.
Whenever I hear this discussion, I always think it's kind of like the wrong argument because I never hear the follow-up about how money gets into circulation.
We imply sort of that that money is given away as opposed to being lent, which is what the Fed does.
They that's what they're responsible to do is create enough money supply to limit it out there.
Yes, the money supply grows by the the by credit expansion that's exactly how we do it with a multiplier effect based on the reserve ratio.
Right.
So the real question is are they credit worthy borrowers?
Is there a legitimate need?
Is the the government just lending frivolously or you know is this uh good policy?
No, no, no.
The question is you've got a number of money center banks, a number of institutions out there, all who have massive inventories, including the Chinese, in something called treasury bills, right?
They bought they bought those from the government so government could finance its operations without soaking us with taxes.
And to a limited degree that's just fine if de if the debt is manageable.
Now those people are sitting on treasury bills.
They may not want to keep them to maturity, even though it might be a short term bill, they may not want to keep they might want to sell it.
All right, if they sell it to me in the secondary market, I buy the bill and I give money to the guy that previously had the bill.
The money supply hasn't changed, has it?
It's just gone from me to the other guy.
But if the government, i.e the Federal Reserve, the lender of last resort, if they buy the Treasury.
If they no, oh no, if they buy through the if they sell it back to the Treasury, there's no change either.
If the Federal Reserve buys it, however, where do they get the money?
They're not the Treasury.
Okay.
So they have no taxing authority.
They just put a credit on somebody's books.
Okay.
And that's where they get the money.
That's creating money.
I don't I mean it's really it's really not that complicated.
I got to move in Minneapolis, Brian, you're up next.
Hi.
Hey Jason, the longtime listener from Minneapolis.
I I'm I I'm agreeing with you, I think a hundred percent, but I want to play devil's advocate on the idea that hyperinflation is the ultimate outcome.
Sure.
And the reason is that with the bank with everybody becoming a bank holding company, the ability Due to them now being regulated.
Uh the ability and probably appetite for massive leverage, especially in the derivatives, probably can't really put the purchasing power uh up nearly as far as it was.
So could we get like a mini hyperinflation positive?
Well, I think that's a absolutely fair point.
Um when I say hyperinflation, I'm not talking about well, you're you're right.
I mean, hyperinflation like the Weimar Republic or something like that, frankly, I don't think is in the cards either.
However, I do think a Jimmy Carter style inflation, stagflation, is in the cards.
Uh now I don't think it's going to happen, you know, until we recover, but the Fed is is expanded its balance sheet by well over a trillion dollars in a matter of a couple of months.
Where did that money go, Brian?
Right, exactly.
Well, let me ask you though this this the Fed ultimately is not going to want to sit on those bad assets.
The point is is we've got a ton of bad paper.
And right now we're not deciding how to fix the problem.
The real game is that we're deciding who gets paper at the end of the day that can be exchanged.
Well, but wait a minute.
Therein lies the point.
Therein lies the point, my friend.
If the Fed is now the lender of first resort, not just buying treasury bills, but they're buying Fanny and Freddie.
The six hundred billion in Fanny and Freddie mortgage backed securities they're buying now, or have pledged to buy.
Uh they're they're gonna turn GMAC into a bank holding company, which means they'll be buying their paper.
All right, now let's say those are all bad loans.
Instead of a bank going under, which which would reduce velocity and to some degree, I guess, the money supply if you if you think it through.
But but the bank goes under.
But what is the Fed gonna do with those bad assets?
The money's already been given out.
The money's been loaned.
It's been created.
Now the government is sitting on bad paper.
Uh well, the Fed is not necessarily depends on if the government ends up having to bail out the Fed.
I mean, uh the Fed the Fed, I mean, would they?
Yes, they probably would.
But do you know that uh last week or the week before, the Fed actually floated the idea of issuing their own debt.
In other words, you could actually buy a bond of the Federal Reserve.
So they they obviously are are secretly hunting for a little more capital.
The one other point I wanted to make, though, is that no matter what, our government, uh I mean the Democrats and Republicans, they will get together like uh blood brothers when it comes to protecting the government's ability to tax and spend.
And as a result, I don't know that they will ever really drive us to a hyperinflation because I would I would flip that around.
I would absolutely flip that around.
Instead of the government bailing out the Fed, the Fed is going to bail out the government.
And that's what has the foreign markets afraid right now.
That is, i let's say we've got a trillion dollars of this uh deficit this year because of the bailouts.
The Barack stimulus package, you know, hiring people to dig ditches and hiring other people to fill them up.
That's gonna be another trillion.
Now, what happens when the government borrows so much that they can't repay it, especially if the private sector is still shrinking?
Uh they they couldn't raise taxes that much.
That would absolutely kill the economy.
There's only two other things they could do.
Allow interest rates to go way up to attract foreign capital.
Now I'm gonna buy a treasury bill if it's fourteen percent instead of zero, or simply repudiate the debt.
Say the Federal Reserve is going to buy all of the government's bonds again.
So instead of going out in the in the private sector and buying or selling bonds, Brian, they're gonna go to the Treasury Department.
How much money do you need?
We're gonna put a credit on your checkbook, wherever you bank Treasury, and all of a sudden the Fed has bailed out the government, and that is inflation.
Uh if yes, they can take that.
The big thing though is how are they going to continue to get I mean you're basically talking about then the monetary transmission system is going to turn into something where we we basically repudiate our debt through inflation.
That's right.
Well, if the debt becomes but if the debt becomes large enough where we can't tax our way out of it without killing the economy, you can't have twenty percent interest rates.
How else would you would you do it?
Well, the the other way is select the default of the uh the bonds that the government right now is pretending to.
If you if anybody thinks that the government's gonna stand behind all this agency debt, I think they're out of their mind.
Sooner or later, uh the the reality is gonna come across that we're gonna have to pick what we're gonna default on.
How about this for a novel idea, my friend?
How about telling the government to get out to quit spending, to forget about a stimulus package, forget about bailing out anybody that moves, let us go through our downturn and not saddle the next generation with debt and spending and taxes and high interest rates.
That's a novel idea, isn't it?
Fad chance, because these politicians are not are not concerned about the economy.
They are concerned about politics.
They are bailing out people, they are creating money, they are raising taxes and borrowing for political interests.
That's what's driving this chaos.
I'm Jason Lewis, and you're on the excellence of the body.
What a great first hour.
Uh that's gonna be some fun today.
I just got this feeling we're gonna pick it up a step.
More coming right up next couple of hours with your calls.
1-800-282-2882, the contact line.
We're gonna get to a California's crisis and the LA Times saying we need tax hikes.
Surprise, surprise.
Didn't seen that one coming.
Maybe they call it fine-tuning the economy out there.
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