Wasington, D.C. -- (ReleaseWire) -- 02/09/2015 --BENNETT: Mark Thornton is a Senior Fellow at the Mises Institute and he also serves as the Book Review Editor of the Quarterly Journal of Austrian Economics. In a January 28th article in The Daily Caller, titled "Federal Reserve To Keep Interest Rates Stable Despite Strong Economy," Thornton called the interest rate freeze "deceiving." Mark, welcome to Financial Myth Busting."
THORNTON: Good morning, Dawn. It's great to be here.
BENNETT: This week Janet Yellen said that, despite improving employment numbers, the Federal Reserve would not be increasing interest rates. In the past, employment has been the primary metric for determining when to increase rates. Are we now just keeping rates low specifically to drive up inflation?
THORNTON: Oh, yes. We've had seven years of near zero percent interest rates from the Fed. We've had one dose of quantitative easing after another. They've been telling us for quite some time now that they were going to normalize interest rates, that the Fed was going to raise interest rates and that we'd get back to normal where you could put money in the bank and earn interest on your deposits. This is the story that's been going on. Now they say, "Well, things aren't very good. They are not as good as we thought they'd be. Things are bad overseas. Our exports are declining." So what they are telling us basically, Dawn, is that unless we get global perfection in the economy, they're not going to raise interest rates.
BENNETT: So they've moved their benchmark. I have to ask, though. Sixteen percent of global government bonds now have a negative yield. Is the United States going to fall into that trap?
THORNTON: Well, we're headed for it. There is no question about that. U.S. government bonds have been rising in price and falling in yield or interest and we are at the all-time record low in terms of the interest rates on the 10-year and 30-year bonds. So we are certainly heading in that direction and we're probably going to go further in that direction, Dawn, because Europeans are buying our government bonds because they are getting zero or negative rates.
BENNETT: If that's the case and suddenly Janet Yellen says they're not going to raise rates, where is all the euphoria coming from, saying that we have a strong economic environment here?
THORNTON: That's a very good question. I think it's because we're the least worst dog in hunt right now. Japan is in recession, China and India are contracting, Russia and Europe are in recession, Brazil and Canada are contracting. The U.S. is one of the few large economies that's actually continuing to grow. And, of course, the U.S. dollar is the world's biggest reserve currency. So I think what you are seeing right now in reality is that people are fearful and they flee to the U.S., to the dollar, to the U.S. stock market, to U.S. government bonds. But I think that in 2015 you're going to see that people are even fearful of U.S. stocks.
BENNETT: The dollar seems to be crushing any sort of recovery dream. 4th quarter earnings per share are tracking 7 percent below the consensus estimate at the start of the reporting season. I think 80 percent of companies have actually reported earnings below consensus expectations. Is that the dollar hurting them?
THORNTON: Yes. It's the dollar. It's the world economy. And the world economy is feeding into oil prices, and oil process are feeding into oil companies, and of course, oil companies, energy companies make up a sizable factor in terms of the consensus in earnings in the stock market, in the S&P 500. So they are all paring back. They're paring back on capital expenditures and export-related companies are seeing lower earnings and lower sales. So, yes, the dollar is hurting exporters in the S&P 500, there is no question about that, and it's been felt most severely in the oil and energy sectors.
BENNETT: What do you think Janet Yellen is actually going to do? My calculation is that in January, we're off $1.1 trillion from the December 29th high in the stock market, and we didn't even get the usual "last day of the month" rally on Friday. Can Yellen ever raise rates, knowing how it's going to impact markets which already aren't doing well?
THORNTON: Well, that's what I'd do. I'd just set the stock market aside and try to normalize the economy, put it back on a market basis rather than a bureaucratic central bank basis. But I don't think she's willing to do that. I don't think she's got the backbone politically any more than Ben Bernanke did. So what I expect is that the stock market is definitely headed lower in 2015, and as the money supply growth rate dries up, and it's already headed in that direction, I expect them to initiate another round of quantitative easing after Europeans have gone through a good part of their QE program. It seems like we're circling the globe where Japan does it, China does it, U.S. does it, Europe does it and then it's back to Japan and then back to U.S.--everybody pushing on the monetary engine of inflation, of credit, of quantitative easing. I think that's what we are headed forward sometime later in 2015.
BENNETT: So the path back to normalcy is for everyone to raise rates?
THORNTON: Yes, I think that's what they should do and everybody should do what the Swiss National Bank did, which is basically: stop with the pegs, stop with the zero interest rates, stop with the QE, and allow money markets to exist again. They don't really exist in the current context because of these zero interest rate policies.
BENNETT: In recent weeks, practically every major currency has severally depreciated: the yen, the ruble, the Canadian dollar, the Mexican peso, the Brazilian real, the euro. Yet, the dollar somehow survives. How do you think that's happening, and isn't it just a matter of time before we suffer the same fate?
THORNTON: I'm afraid so, but in the short-term, in the last several months, basically what we're seeing is Europeans, Japanese, Chinese, Brazilians, knowing that their currencies are headed lower, they are turning their currencies into U.S. dollars. So, it's a flight to safety, it's a flight to stability, it's a flight to the best or at least the least worst currency in the world. And of course, Dawn, you also know that remarkably with these higher dollars, that gold prices in terms of the dollar have not only stabilized, but are headed higher.
BENNETT: They've converted their unbacked, make believe, soon to be worth a lot less paper money into something tangible. I think that's one the reasons why gold's been bidding up in particular with the Euro.
THORNTON: I think that's actually sad but true. I couldn't have said it better myself. Gold and silver prices, the gold and silver mining services stock prices, have all stabilized when everybody was expecting them to collapse with the fact that commodity prices and energy prices are collapsing. And yet, gold and silver stabilized and headed higher in terms of the dollar. So that's remarkable and I think it tells us a great deal about the global economy as it exists entering 2015.
BENNETT: I want to talk a little bit about Greece because the open letter to Germany and to the European Central Bank was surprising, in a good way, for me. This week in Greece, the voters elected a new government that promises to undo austerity reforms imposed by the EU. Do you think this is actually going to work?
THORNTON: Well, I think it's going to happen. The Greeks invented democracy, they perfected the art of using the right to vote to vote themselves as much benefits as possible and to impose as much costs on foreigners and outsiders, and they've been doing this for decades and decades, and their entry into the Euro zone is not a detour from their past history or their politics. They are experts in doing this kind of thing and they're going to default on part of their obligations. They're going to default on austerity to a certain degree and they're going to require that the EU renegotiates the bailout loans as well as other loans. They are in a very good position because not only do we have these economic problems, we also have the problem of the crisis with Russia and the Ukraine and the fact that the EU wants to use more measures, more sanctions against Russia, and Greece has a veto power over all of that. So, despite Germany's outburst of demanding that the Greeks get in line with Germany and the Europeans, I'd say that the Greeks are really in the driver's seat here and expect them, maybe not to be dictating the terms of how things are going to be moving forward, but just to know that they are in a very good bargaining situation with respect to the Russian situation, with respect to the loans, and the bailouts and austerity.
BENNETT: Do you think that the open letter from Greece to Germany and the ECB is going to work?
THORNTON: Well, I think it's going to work to a certain extent. The fact that the European Central Bank has put forth this quantitative easing program at the same time indicates to me that Europeans are putting themselves in the position to be able to accept some kind of additional bailout, or buy-down of the bailout money that the Greeks have received and that they are supposed to pay back. But, I think everybody who is in the know doesn't expect Greece to pay back 100 percent on the loan.
BENNETT: If they don't pay it back, then Portugal won't have to pay it back, and Spain won't have to pay it back. There's going to be a lot of default going on.
THORNTON: Yes. And as soon as Spain and Portugal and maybe others see that the EU isn't in a great bargaining position and that their banks are very fragile as well, expect that there are going to have to be write-offs. We're living in a world where obligations no longer matter and where directives no longer matter. There's no rules of the game anymore, the way the central banks have been playing this. So. expect a lot of turmoil going forward in 2015. Hopefully though, by the end of 2015, a lot of this stuff will be resolved and there will be a more reform-minded mindset worldwide, and a lot of these uncertainties that are facing us will be resolved one way or the other.
BENNETT: That resolution might lead to social chaos and political issues. What do you think that means for the EU itself and specifically the euro? If the EU can't enforce its rules, why should anybody trust their currency?
THORNTON: Well, the Austrian economists—and that what the Mises Institute is all about, it's Austrian economics—we've been arguing that the Euro is an irrational currency even on the basis of fiat currency. The Euro doesn't make any sense because you have a unified currency but a very un-united fiscal situation. So you have a situation that's rife with opportunities for countries like Greece to behave financially irresponsibly, and then force the others to make up the difference and to provide benefits and subsidies in order to maintain their currency. So, we've been arguing all along that in the long-run, the EU itself could stay united in some sense, but that the euro itself is going to have to be reformed, to be either renegotiated or torn apart. So, yes, there is a lot of financial chaos that's possible moving forward, but we have to move the world from this bureaucratically determined economy to one that's market determined. And the market may be a lot lower for currencies, bonds and stocks and maybe a lot higher for gold, who knows. But once we get back on a market determined basis, things will actually be much more stable than they are right now, where everything seems to propped up, from currencies to economies to financial systems to banking systems. We need to get back to the market and get off of this centrally planned, central bank managed economy where central banks are trying to float bond markets, trying to float stock markets, and trying to get involved even in political matters and foreign policy.
BENNETT: By market determined, you mean free market principles?
THORNTON: Free market principles, and supply and demand.
BENNETT: On the matter of the open letter to Germany and the ECB, do you think that we're going to be getting a letter like that from the Federal Reserve one of these days soon apologizing for what they did to us? The letter used the phrase, "fiscal waterboarding," and it does feel like that. We'll never be able to pay off our $18 in debt.
THORNTON: That's a great point and that's the key central point in the world today. It's the question that nobody is really asking and I thank you for bringing it up. I'd love to see the Federal Reserve apologize for what they've done. They've been on this multi-year unprecedented policy of monetary manipulation. I can't stand it. It eats my gut out and I'd love to get back even to the world that existed prior to the economic crisis. That would be preferable to the one we're living in today, where the national debt is not even a concern for the U.S. Congress apparently. We're $18 trillion in debt and we're facing a fiscal future, with Social Security, Medicare and Medicaid, and Obamacare, that only promises to add tremendously to that. So we've got to get off this train because this train is going to wreck. The sooner we do that the better, but I don't have any faith whatsoever in Janet Yellen, or Ben Bernanke, or Paul Krugman.-
BENNETT: Why does it take such a long time for most people to figure out their government is clueless, or even lying? Do Americans just trust too blindly?
THORNTON: Yes. I'd say that's been our history. America has been the city on the hill, the city of light, democracy for the world, and all great things, John Wayne and apple pie, but more and more Americans are dropping that. More and more Americans are turning to alternative media. They are turning to Austrian economists, Rand Paul, Peter Schiff, Lew Rockwell, and so forth. They are coming to Mises.org and getting an alternative source of information. For Austrian economists, we know this stuff, we see this stuff, we're not blind to these things, and it's been so long, seven years of this economic crisis, 6 years of the housing bubble, 30 years of mega government debt and over 43 years of fiat currency. So we are not blind to this stuff, but we're actually optimistic about the future because people's mindset is changing, it has been changing, and it continues to change at a very rapid rate. So, while we see the mainstream economists, the mainstream media having all this power, authority and ability to snooker the American public, what is actually happening in the last few years is that more and more Americans are waking up to all of this and they're getting alternative sources of information and they're changing their policy beliefs, and they don't trust the government and support for the U.S. Congress is now less than 10 percent. So, when you look at favorability, root canals now have a greater rating in terms of favorability than the U.S. Congress.
BENNETT: One of the reasons why I think they're waking up is because every time the United States government reports the GDP or the unemployment number, they just know it's impossible. The unemployment picture in America is not as rosy as Washington wants us to believe. Why do you think they do that? Are they not doing their own math? Even after the latest report claimed that unemployment dropped by 0.6 percent, they told us that the GDP in the fourth quarter of 2014 grew 2.6 percent. Shouldn't our GDP be looking stronger if the employment picture is truly improving? I don't particularly believe that GDP number, but fake numbers are fake numbers. You can't really calculate them.
THORNTON: Dawn, they know that. They know that all along, but they use statistics to mislead the American public. As you point out, 5.6 unemployment and you are in an economic recovery. GDP, even as measured by the government, should be 5.5 percent growth in a recovery. But it is not, of course, and we're the best in the world, or one of the best big economies in the world. The truth with the unemployment rate is that basically it's been coming down as people are no longer being considered as in the workforce. They've been unemployed for so long that they are no longer looking for work and therefore they are no longer considered in the workforce. Therefore they drop out and unemployment rate falls. That's not a good way. Typically, in an economic recovery people go into the workforce, they don't leave the workforce. So basically, we've seen the unemployment rate come down from double digit figures to 5.6 percent on the basis of two things. One is that people are no longer considered in the workforce and the other is, people have been transferred from breadwinner jobs that can support their family to part time, low paying jobs. So those are two ways in which unemployment rate has fallen, and there has been absolutely no job creation in the breadwinner sector where you are talking about full-time work, you are talking about somebody who is producing a product or a service, and somebody who is able to support a household budget rather than just an individual budget.
BENNETT: Mark, I want to thank you so much for being on the show. Mark Thornton is a Senior Fellow at the Mises Institute in Alabama, and an editor and author whose publications include The Bastiat Reader from 2014, An Essay on Economic Theory from 2010, and The Quotable Mises, from 2005.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com. She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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