280: Steve Hanke - Decoding the Drivers of Inflation and Markets

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Usually, but that's not the case now. So that that makes this breakout kind of unusual.

and served on President Reagan's Council of Economic Advisors. Very recently, Washingtonian magazine recognized Professor Hankey in their annual list of Washington, D.C.'s 500 most influential figures in shaping public policy. And did you know that Professor Hankey also trades?

He had his first exposure to the markets and started trading commodities when he was just fourteen years old and started learning the importance of closely following macroeconomic factors which impact the prices of currencies, commodities, and consumer goods. Professor Hinke's evidence-based approach uncovers the deeper forces driving inflation and market fluctuations and challenges prevailing narratives as it relates to economics.

By exploring macro topics often overlooked by the mainstream, Professor Hankey broadens our collective understanding and invites us to think more deeply and critically about the economic forces shaping our world. Now without further ado, ladies and gentlemen, we are so honored to present Professor Steve Hankey, currently in Baltimore, Maryland.

candle'em, sort'em, grade'em, clean'em, and put'em in coal storage until they uh had accumulated a a semi full of eggs to ship back to New York or or Boston. Mm. That there was a time interval between the time that you put the eggs in storage and the time that you actually shipped them back east. As you know, with any commodity, uh as time goes by, there's price risk, prices going up and down and so forth. In those days, the Chicago Mercantile Exchange had an egg contract, futures contract.

And so if if he didn't want to take the price risk and the price looked pretty good, he he'd he'd sell the eggs forward. And so I l I learned how to do that with my grandfather. I was about ten years old and then By the time I was fourteen, I did open my own trading account and and was trading what? Commodities, mainly soybeans. So it it's just part of life there. I I mean er every it's all c all based on agriculture and agricultural commodities of of one sort or another.

and had concluded that OPEC was going to collapse and oil was going to go below ten dollars a barrel. And that was in late nineteen eighty-five. And of course in 86 it it did exactly what I anticipated it would do. So it was a it was a huge trade and we we had massive short positions on crude. Uh after the fact we found out that we we had about seventy percent of the short interest in the London market. Wow. So so we had very big positions.

That was a pretty spectacular. And then there were others the the collapse of the Russian ruble in nineteen ninety eight, I I actually had given a speech, I think it was in February of nineteen ninety eight, in Vienna, and I observed that the

net foreign asset position at the Russian central bank was was going down very fast. And to compensate for that decline, the net domestic assets were going up on the balance sheet very fast. And that When you see that kind of thing happen, you you know there's trouble i in the in the wind.

And I indicated that and uh Reuters reporter was ha happened to be reporting on the thing. He minute the thing hit the wire, the ruble went down three percent. And I I knew I was on to something and so obviously put some short positions on and and the ruble did collapse spectacularly and August of nineteen ninety eight. You probably remember that. This was it was it was a pretty big deal. So both of those were big international things.

OPEC collapsing, oil prices going below ten dollars a barrel in nineteen eighty-six, that that was a big deal, and then the ruble in nineteen ninety-eight. But but there have been other trades in in nineteen ninety-five. I was a president of Toronto Trust. Argentina in in Buenos Aires and and that was the best performing fund in the world in nineteen ninety five. So that was not one trade, but the the portfolio was a big winner. It was a the best one in the world.

It looks like the Fed funds futures market doesn't anticipate anything until probably getting getting into the fall sometime. So they they keep pushing back the time line for when they expect. The Fed to l lower the Fed funds rate. Now now Paul did indicate that they were going to back off the quantitative tightening, that is re reducing the size of the balance sheet and the bond government bond runoff that they've had. That is a loosening.

So he's talking about staying the course with the Fed funds, but in fact loosening a little bit on the quantitative tightening. So that's that's what he said. And we don't know when he will change. Because the Fed is data dependent. They just look at the daily data and see what's happening in the various markets. And then they decide uh, you know, it's basically a finger in the wind operation.

Are we are we gonna tighten or not? So you you don't know what they're gonna do. They they can pivot tomorrow one way and and then the next day they'll pivot the next another way, depending on what what the data are saying.

It this is a wrong headed approach. They should be looking at the quantity of money, which they're not looking at. They're not paying any attention. They look at the like what they call a financial conditions indices. They have a bunch of financial indicators on interest rates, interest rate spreads, uh shape of the yield curve, all of this kind of stuff.

all these data points are looking at are moving around, but that movement is caused by something that happened prior to those changes and and that's

determined by changes in the money supply. So you have to embrace the quantity theory of money, that money is a fuel of the economy. If you if you goose it The asset prices are going to go up, commodity prices are going to go up, uh uh with a with a lag, and then another longer lag, economic activity is gonna start changing, it'll it'll go up, and with even a longer lag.

inflation is going to start moving. So so where where are we as I see it? That we're we're we're in a situation where the money supply is actually contracted since early two thousand twenty two. It's gone it's gone down. I mean it's it's smaller now than it was back in two thousand twenty two. This has only happened four times in the United States. So you you've got to go back into

nineteen forty nine to pick up the first time you got a contraction and of course that was followed by a recession. And then you go back to nineteen thirty six, thirty seven, there was another contraction. That was followed by a recession. You go back to nineteen twenty nine, nineteen thirty three, and of course you had a huge contraction in the money supply and a Great Depression.

And then you the the the fourth one you you go back, I I think it's 27, 28, I can't remember for sure, but you had a recession. So all these contractions do what the quantity theory of money tells you. or anticipates the contraction should do and that that's cause a slowdown. That's that's why I I can say with confidence that a a slowdown is baked in the cake in the United States.

because of what happened a year and a half, two years ago, two and a half years ago with the money supply, you know, contracting, contracting. So wait.

Anticipate uh John Greenwood and I do this work together. John is a fellow at the Johns Hopkins University at my institute uh for applied economics. And uh was for many years a chief economist at Invesco uh until he retired a little over a year ago. So economic activity slowdown is baked in the cake. The other thing that's baked in the cake is that it

that we will eventually start moving down again with prices, pri the consumer price index. It'll start going down and and we will get down to that two percent inflation target the Fed has.

Uh you know, may maybe it won't come at by the end of this year, which John and I originally thought maybe it'll be a little bit longer, but You have to remember that the tricky thing about this, Ian, is that there are long and variable lags between changes in the money supply and changes in in all these indicators. So to put your finger on exactly when something's gonna happen is kind of a fool's game. But you do know it's gonna happen. That's w that's why the bake to the cake thing comes.

And and bank deposits, liquid bank deposits are account for about seventy-six percent. So banks are the elephant in the room. And then you've got uh small retail savings accounts, that's another five percent. of broad money M2 and then money market funds are about eight percent. So the the the commercial banks are a big deal and they they have contracted. They're part of the contraction. And now the bank credit is is basically year over year more or less flat.

And and ever since then, by the way, the money supply has been growing at about two to four percent in Japan. It's it's been very tight. Now it's growing at 2.5% per year in Japan. Very tight. It's always been very very tight. for, you know, we got thirty years, a little over thirty years. When I say tight, it's tight because Hankey's golden growth rate for the money supply measured by M2 in Japan, that would be consistent with hitting an inflation target of 2% is about 5%.

So you can see these all all these numbers I've been giving you, the two to four percent range, that's that's low, tight, tight. 2.5, the current number is tight. And what about the fiscal side? The fiscal side is So you have very tight monetary policy and e ultra loose fiscal policy.

And and and what's happened to economic growth and inflation in the last thirty years in Japan. They can't get their inflation rate sustained and uh up to two percent. It's been it's been generally below two percent. All was thirty years. While they've been expanding the fiscal side uh fantastic. deficits and and fiscal expansion. So that is one example that where money uh money dominates. The other clear example is the US in the 1990s. the the fiscal policy was very tight. President Clint

actually reduced government i expenditures uh by by more than any president, uh in in relative terms, by the way, that we've had since World War II. Clinton was very very tight fiscal. He he reduced government expenditures by 3.9 percentage points in his two term as president. And the last two years of his presidency, he actually ran fiscal surpluses in the United States. So he was a very tight fiscal policy. At the same time, we had accommodative.

I think appropriate monetary policy. The Greenspan was a chairman of the Federal Reserve and we had monetary policy running uh, you know, monetary growth M2 was running about six percent. More or less six percent, which is consistent with Hankey's golden growth rate, the golden growth rate consistent with hitting a two percent inflation target. Inflation in those t years was actually just a little below two percent.

So money dominates. The Japanese example in the in in the nineties going forward, very tight monetary policy, very loose fiscal policy, and what do you end up? A slow economy and very low inflation. In the US, you you had a very tight fiscal policy in the 1990s. I wouldn't say loose, but no kind of optimal monetary policy and you had uh very rapid economic growth and inflation that was was low.

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So the money s the money supply is not in the models. All all these modern post-Keynesian models that most of these ex so-called experts have been trained in in their PhD programs, they they don't include money. So that's one reason the models. And the other factor I think that is important is the fact that out of the seven hundred and eighty five economists the ratio of Democrats to Republicans is forty-eight point five to one. So so there are they're there are more or less fifty

Democrats for every Republican. Now you say, Well what what's that have to do with anything? Well I I think it has a lot to do with the i i with the situation because Milton Friedman, a known Republican, a Nobel laureate in economics, was is basically the dean of the quantity theory of money. He he was he was all his macroeconomic model. The fundamental thing in there is money, and that's uh of course the model that I use too with the quantity theory of money. So Friedman's kind of

For any Democrat, Friedman is more or less enemy number one in the economics realm. So so that that's that's another factor. So it's it's the modeling uh uh it's and and the composition of the uh political alignment of the so called experts of the Fed that that those are the main the main drivers in there, keeping the quantity theory out. It it's just out of fashion. It's just not only the Fed, by the way.

But all the all these models don't include money and and all the models are used internationally. It's is this not in the United States?

And as I say, it's po uh their post Keynesian models for the for the last thirty years have been the order of the day. So that's that's what the academics produce. That's that's not what I use, but that's That's what the majority of the freshly minted PhDs will be uh exposed to, whether they're in the Canada or the United States or the UK or you know, the continent, where you you name it.

And and as interest rates go up, th there's a a a big incentive to clean up your balance sheet and and get those debt ratios down. Because if you don't get the debt ratios down and you're a corporation you're you're you're gonna have problems because when you go to the bank and the bank's looking at your balance sheet and and you and you look like you're over leveraged, you've got a problem.

the volatility not that you get two things going on. One one is that the level of interest rates have gone up, but there's there's now volatility in the thing. So the combination of the volatility and and the higher level of rate Is meaning that re refinancing or new borrowing by corporations is is gonna cost you more. And in terms of ca uh so in terms you you wanna deleverage. And then also in terms of capital budgeting and just basic capital theory.

if if the cost of of whatever you're borrowing is is higher, there are many new projects that don't don't go over the the green light zone. Mm-hmm. So so yeah, so I mean it uh you know, i interest rates uh you know play play a role and and it's all

wrapped up with capital theory. And as Sir John Hicks, Nobel laureate, w once said, there's nothing more important than a balance sheet. So whether you're an economist or a bank or financial person or a corporate person, you know, uh a vice president and sh a C CFOs pay attention to this.

r regime. And and and we do have that in in the United States. So that that's possible. If these huge budget deficits are deemed to be unsustainable, which they are, there are only two ways to fix it. One one way is to increase taxes, and the second way is to reduce government spending. That's how you get rid of them. You either reduce the expenditures or increase the revenues you're getting from taxes. And if they go.

Increased tax route to get the deficits on a sustained basis in the United States, that will definitely. put a damper on economic growth. So the so that that would be a slowdown factor. And then the the inflation factor is is all dependent on the on the Fed and monetary policy. Inflation is always and everywhere a monetary phenomenon. The only way it comes, by the way, from fiscal deficit. is if the Fed or whatever the central bank happens to be in the country you're located in.

starts buying the bonds that are issued to finance the deficit. And if they do that, that's called monetizing the debt. It increases the money supply. And if you increase the money supply, you're going to get more inflation.

Then then the next thing is after you decide what to put in the index, of course, things change over time. Are you going to keep those things in the index or You know, you're gonna keep buggy whips in the index uh uh or and and and And the horses and so forth or or are you gonna eventually take them out and put cars in there? It's dynamic, it's changing all the time. Then whatever is in the

basket, if all those prices of all the items go up and down exactly in proportion to each other, that doesn't pose a problem. But what if they're going up as they do? Some go up much faster. than others. Some even go down. So they're moving around. Everything in the basket's moving around. What we call relative price changes are occurring all the time. And so then you have to make another judgment. Well

How much weight should we put on each one of those things in the basket? So you have to decide what's in the basket and then what weight do you put on the basket, uh items in the in the basket. As you can see, it it's kind of a tricky business. And and it's highly subjective. Now in nineteen eighty-three there there was actually a big change because interest rate.

used to be in the basket and looking at the s the consumer price index or so-called cost of living, interest used to be in there. So your mortgage interest was in there, credit card interest. Interest on loans for cars, for example, that used to be included in there.

And financing cost of all all kinds of things where interest was associated. Well, now it's uh as a result of that, if you calculated things the way they did in nineteen eighty three and you looked at June 2022, that's when the consumer price index peaked out in the United States, 9.1%. By the way, John Greenwood and I using the quantity theory of money

We nailed that thing. We predicted that inflation might go up to nine percent. It went up to nine point one percent. But that's the consumer price index, the way the way they calculate it now. And that's calculated without influence. Interest is not included. Okay. Now, what if we do it the way they did it in nineteen eighty three and we included interest? Num that number would have been eighteen percent. It would have been almost double.

We have the borrowing cost, and we add to that a third item, the unemployment rate. Those are all negatives. Those are all miserable things. If inflation goes up, it makes you more miserable. If your borrowing costs go up and makes it more. Unemployment goes up, it makes the uh uh w workforce more miserable.

And and then you subtract from that GDP per capita, that's that's a positive thing. If your in income is going up, that's good. So you subtract that from the three bads and you get Hankey's misery index. So Last year, the most miserable countries in the world, Argentina, then Venezuela, then Lebanon, then Syria, then Zimbabwe. Now, if we look at the least miserable countries, the least miserable was Thailand, then Japan.

Then Switzerland. Well all all those have very low interest rates and low inflation. So that's why that's why they come in uh l least miserable. So so in a in a nutshell, this isn't some conspiracy or anything like that, in my view. These these are these are professional people at the Bureau of Labor Statistics.

coming up with these indices. But but there's a lot of subjective judgment that goes into what should be in the index and uh and and m more most recently, early this year, former Secretary of the Treasury, Lawrence Summers, who's a professor at Harvard and and three other uh co authors that he had, uh produced a a paper at the National Bureau of Economic Research.

where they get into this business of the nineteen eighty three change and they make the point, which I think is valid, given my misery index, they say Everyone's wondering why The economy's supposed to be doing pretty well in the United States. Inflation's coming down, the economy labor market's tight, the economy's growing, stock market's pretty hot. But why are why are people so fed up with Bidenomics and Biden and they say it's because financing costs, the interest is much higher than it was.

when Biden came into office. And and as a result of that, that's the borrowing cost thing and interest. And if you include interest in there, you of course get a a much higher CPI. And that's why people are really so fed up. They're not so fed up with a consumer price index, uh maybe a as as i it's coming down. But they argue if you actually calculated things the old way, the inflation rate would be a lot higher.

And and that's what's bugging people. And it would be a lot higher because their financing costs are a lot higher.

Your cred your credit card debt is costing you more. If you go to the bank, it's costing you more. Your mortgages are costing you a lot more. Mortgages in the United States, they've they've essentially made housing unaffordable.

And they claim that if we were to go back to the way we calculated inflation in nineteen eighty or nineteen ninety, that uh the inflation would be well above ten percent. And then therefore GDP would be contracting that entire time. What what is your take on that?

The Center for Financial Stability in New York actually has M three and M four. They even have broader. So if you really wanna get into broad money measures, you you have to go uh really to s the Center for Financial Stability and And there you you get uh my I I I'm a special counselor there at the Center for Financial Stability and the and the kind of guru on measuring money and changes in the money supply is.

Professor William A. Barnett, uh uh Bill Barnett, uh great, great expert on this, probably the world's greatest expert on measuring the money spot. But l let's talk about this thing that where shadow stats is getting actually mixed up. GDP to to calculate the inflation adjusted. GDP, you you've got to use a GDP deplor, not not a consumer price index.

Consumer price indices are uh indicate changes in the cost of living. That that's what they're supposed to do. But the GDP deflator is a is another index, by the way, another price index. That's used to adjust nominal GDP and and translate it into real GDP. So shadow stats is it it's just an apples and oil in this they should be using a GDP deflator. And if they were, the GDP deflator is deflating it in an orthodox appropriate way, let's put it that way.

Uh, how much is shrinkflation impacting uh the real effective inflation? And does the government accurately really take that into consideration? I mean, uh apparently the I saw the site that says the BLS. claims shrinkflation only has had a total effect on food of just two and a half percent spread out over a four-year timeframe from twenty nineteen to twenty twenty three. Um how, uh what's your take on all that?

So and and shrinkflation as part of the whole measurement problem. It's just another problem to put in there. And it's a problem associated with all kinds of economic aggregation and all kinds of indices. It's it's inherent in in in the animal. And by the way, you can't make any kind of reasonable observations or modeling or anything else without using economic aggregate.

So y so you have lots of measurement problems. It just comes with a territory. So If you focus on one thing like shrinkflation and the s size of a box of cereal or something like that. This is a problem and and and there's no way to get around it. It's it's just it's just inherent.

fifty fourth year at the Johns Hopkins University as a professor, one of my professors was was a f was a famous professor, Kenneth Bolding. He was president of the American Economics Association. And Bolding has a has a great chapter in his macroeconomic in his two volume book. on economic analysis. The macroeconomics book, I think the second chapter is on in d index numbers and aggregation. It goes through all of this stuff.

They they don't even teach this anymore, by the way. Most economists have no idea what we're even talking about. Now, at the official US government people, believe me, they they know a lot about index. Or if you take somebody like Bill Burnett, he's a professor at the University of Kansas, but he he's also a fellow at the Center for Financial Stability. He he's probably the world's expert on index numbers.

I mean it it it's a highly, highly technical field. And what and what are they trying to do? They're trying to measure not two things. The volume of something uh as well as the price of something. If you multiply P, the price, times the quantity Q, you get something called the total value of whatever is in the box. So so th this is just a huge huge problem. Well by the way, one of the best books. I'm gonna turn around. I'm at my home library.

by Oscar Morgenstern, very famous economist, m mentor of mine, on the accuracy of economic observations. I mean, I I I look at this thing every week. even though it was published originally in the nineteen sixties, let me see the publication date, nineteen sixty five, it remains, I think, the best overall treatment of of all these measurement problems.

The dollar is extremely strong. The dollar is in a huge bull market. And usually when that happens, uh gold is not in a bull market. If you get dollar strength, you'll get gold weakness, usually. But that's not the case now. That makes this breakout kind of unusual because after all, the dollar is the international currency and very important. The dollar euro rate might be the most important price in the world or or or maybe the dollar gold ratio. One at one of the

one of the one of the two. But but at any rate, what you find is that uh central banks are buying and the central banks that are really buying big time are China and Russia and their strategy is to de-dollarize. They they wanna have something on the balance sheet that's not issued by a sovereign. Gold is not a liability of any sovereign. So th so they g they get away from

the politicization of things by the and the politicization potentially of fiat currencies. They get away from that. So that's one thing in the background. That's that's a positive. Uh and then you look at at non central bank buying

shall we say out outside of China. I'll come to China in a minute. Shall we say in the in the West? And that's actually been quite weak. If you look at the ETF holdings, they've been going down. You look at bullion sales, they've been going down. You look at premiums on physical gold being sold in Singapore, the premiums are low, not high. So all of that indicates that there's not a strong demand in the in in in the West that shall we say the retail

or or or non-central bank retail and wholesale markets. So where where where's the where's this juice coming from? It's all coming from the the the retail and wholesale markets in China. It's it's a China story. And and in commodities, by the way, in general, it's all a China story. All commodities. Now you get some oddball things like cocoa right now. Cocoa's gone to the moon. It's backed off a little bit in the last few days, but but that's because of weather conditions and the fact that

They haven't been maintaining these plantations in the Ghana and the Ivory Coast properly. So the the yields are very low and uh and just a huge shortage is is built up in cocoa. So you get a few things that that aren't China centric. But most commodities, most industrial commodities. And and even even some soft commodities, agricultural uh uh commodities are are all driven primarily by what's going on in China.

So when I did a little bit of just simple digging, um, I was shocked that in twenty twenty three the US borrowed three point one trillion, but only two point three trillion of economic activity was generated as measured by GDP. Meaning$800 billion was borrowed, presumably spent, but generated zero economic activity. How is this even possible? And where did all that money go?

So that that's what people learn and and that's why they say, well, fiscal policy. They always talk about monetary and fiscal policy. That's the macroeconomic tools and fiscal policy is a big tool and and if you run a fiscal deficit you goose the economy because of the multiplier effect.

Well, it turns out that uh and and one of my former colleagues and collaborators, Sir Alan Walters, did a lot of work on this. And what what what what he found was that if fiscal deficit and debt to GDP ratios were were kind of a in a in a moderate zone. Yes, you do get a tend to g tend to get a positive fiscal multiplier and a a goose when you increase a fiscal deficit. But what if the fiscal deficit

pretty large and and outside this kind of normal zone and the and the debt to GDP ratio is large. Well then if then if you increase and get it further away from the norm, the deficit, you actually get a negative multiplier because confidence is hit. You get you get a negative confidence shock because people are afraid that that what's gonna happen? That the that the central banks will monetize that extra deficit and if they monetize it, they're gonna get more inflation.

not real economic growth. And so that's that's the line, that's how to interpret these negative fiscal multipliers. The the the the Keynesian textbook theory is that the fiscal Keynesian multipliers are always positive. That's not that's not correct if you look at the actual data. And and they they turn negative When the fiscal deficit And debt ratios become too big.

So that that's that that that's that's one zone that that we're getting into. Now you're you're you're talking about something that I think is a little bit different, I think. It's n it's not clear. This is this is a danger with googling around, by the way. I I I'm very opposed to all of this Googling everybody is doing.

Including you, because you you ha to to make any sense of Googling you have to have a theory before you start Googling. And if you don't have a theory, you're just in a mass of confusion. confusing yourself and if you listen to these financial reports on the on the television or radio or or on YouTube podcast, it's just a mass of confusion out there because

Because no one really there are very few people who have their theory straight on the thing. So so what what I think my interpretation of what you started with with this borrowing and and some somehow the the level of transactions that go on are a lot higher than The final GDP. And that is true because there's something called gross output. And if you if you look at the measure for gross output, that measures all the transactions

In the supply chain, there are lots of intermediate things happening before GDP. GDP is the measure the final value of goods and services produced in the economy. It's the final. It's kind of the bottom line. But before you get there, You you've you've got the miner who's mining the uh the raw material, and then you've got and and he sells it.

for some value to a processor and the processor then processes it, maybe several stages of processing, and then fabrication comes after that. All these things are sales going on. And that's what gross output measures. And that will always be way greater than tip typically greater than GDP.

That number. And what's interesting about gross output right now, it's that is something I follow as as an Austrian economist. gross output's very important. And and the the big the big advocate of this and and guy who's been promoting it and doing a good job of it's Mark Scous.

Professor Mark Skowson has been doing doing this work. I've written about it supporting Skowson's work because I think it's first rate. But gross output now, what's going on? Remember I said The recession is baked in the cake because of monetary theory and the contraction of the money supply. But also another complement to what I said and reason for why I think we're going to have a slowdown is that gross output it has been growing at a slower rate than GDP.

for the last couple of quarters. And and that means transactions going on in the background. In the background of GDP, they they they've been the rate of those transactions has been going down.

Added to the GDP, but since 2006, uh for every five-year period since 2006. has generated a multiplier of less than one, which I thought was supposed to be impossible. I mean, how does G how can GDP grow less than the amount of the debt that was borrowed and actually spent into the economy?

to GDP. They're they're just ma they're measuring different things. We we've had a lot of co this conversation and has is has been about measurement of different things. GDP tells you something different than gross output. They're just two different things. And the question is, how do you? How do you as a as an analyst and as economist, how do you put these things together and understand them and and the relationships

Over the business cycle, for example. And and that's that's one thing. Uh over the business cycle. The other thing you've got to understand is more or less what you're getting into, and that's this secular thing, is is something over the long run happening here. Is is a structure of the economy changing in some way that's making these these various measures and their relationships to one another diff change over time. So there's a lot going on here.

How are they gonna stop it? How how will it stop if it isn't sustainable? And I've already said you you got only one of two ways to do it. Either you increase taxes or you reduce government spending. Or and and when you when I say increase taxes, you know, there are two ways to do this, Ian. One is that they Hanky a larger tax bill.

And we know if you want to reduce government spending like Bill Clinton did, uh you reduce government spending. Now Clinton, by the way, had a great advantage and remember he was president right after the Soviet Union collapsed and communism collapsed and so there was a what we call a huge peace dividend. The defense expenditures went down, down, down. And that was that was a peace dividend. So that's one he had a lot of wind at his back. to reduce that government expenditure.

you'll stay in business. You might even grow. If you have losses, you're eventually going to go bankrupt and go out of business or stop stop or stop d supplying whatever is causing the losses. So ex post facto, we we have a measure in the profit and loss system. That's the beauty of it. At at the at the end of every year, the books come out and you can see Whether you've made a profit or loss, you you know what the rate of return on capital has been.

But that doesn't happen in the public sector. They they come up with all this pie in the sky spending and and and no one ever looks at ex post facto at the government. So we can't look any place. We we ha we have no nothing equivalent to a profit and loss statement for the for the government expenditures.

So that that's the answer to the thing, and and that's why we we know it must be very wasteful. And and the reason for that is that Decisions are being made by people who don't pay the cost of the mistakes that they make. And therefore we we have a lot of bad decisions. By the way, the only studies that have been done, and I I have done some of these ex post benefit cost studies,'cause that that's one one field I I

not so much anymore, but I used to specialize in this, especially with these big infrastructure projects and water projects. And none of those had had in fact generated benefits greater than cost. Are the ones uh the ones that I looked at, big big water resource projects. They were they were all losers. The governments tend to get into mega projects, these big projects. This is what this is what's happening right now with with Biden, by the way.

He's he's very big into what we call industrial policy. And that's where the government is making all these decisions. And if you look at, for example, the Inflation Reduction Act The Congressional Budget Office predicts, this is X ante before. They predict it'll cost$391 billion in 2022 to 2031. Goldman Sachs estimates it'll cost one point two billion.

In February or March of 2022, I can't remember the month now, but at any rate, early 2022, it peaked out at growing twenty-seven percent year over year. That's that's the highest it's ever grown. And since the founding of the Federal Reserve in 1913. And the golden growth rate, Hankey's golden growth rate is about 6%. That's a rate consistent with the 2% inflation. So we had this huge increase in the money supply. Due to people believing in M MMT.

of m uh money supply growth in twenty twenty and we're still just getting back to trend line. So who cares if we're uh contracting the money supply? We're just taking the excess off the top.

uh that were in the economy and M two divided by GDP went way up above. the trend rate of growth of about 1.7%. And now it's back down to the trend rate and and the the contraction's starting to to bite.

fiasco in in two thousand. Remember that? Then then it got up to about forty five. Now it's about thirty five. But the thirty five number has not been realized since eighteen eighty one only five percent of the time. So all it's saying is that the stock market's very pricey now.

We've got a few things that are pushing these these indices way up and and a bunch of other stuff that really isn't doing that that great. But but the index itself is is very pricey.