Build ing The 10%

LMR N O V E M B E R • 2 0 1 2

P U L S E O N T H E M A R K E T

L A R A - M U R P H Y R E P O R T

The 2013 IBC Think Tank

The Next Big Step

Peter Schiff vs. Paul KrugmanGot Your Fiscal Parachute?

Hidden Tax HikesManufacturing Slumping

Central Banker Musical Chairs

Page 12

Austrian Business Cycle Theory:

You Can’t Stop AnIdea Whose Time Has Come

Page 4

Page 17

Interview with Peter Schiff

Page 6

The Real Crash Is Still Coming

Peter Schiff vs. Paul KrugmanGot Your Fiscal Parachute?

Hidden Tax HikesManufacturing Slumping

Central Banker Musical Chairs

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Bring a Privatized Banking Seminar to your city.

3 Speaker / Authors from the Austrian School of Economics

L. Carlos LaraRobert P. Murphy, Ph.D. Paul A. Cleveland, Ph.D.

3 Dynamic, Informative, Inspirationaland Educational Hours

Inquire directly with Carlos Lara 615-482-1793, or Robert P. Murphy 212-748-9095,

or e-mail us at info@usatrustonline.com

Present the powerful combination of

Austrian Economics,

The Sound Money Solution

& The Infinite Banking Concept

to your Special Group

• Demystifies Fractional Reserve Banking • Learn how you can personally secede from our crumbling monetary regime and improve your financial future. • Sound economic reasoning with a sound private strategy to direct the individual toward the escape exit. • Learn the warning signs of a coming crash and the steps you need to take to avoid them.

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IBC THINK TANK: THE NExT BIg STEPBY L . C ARLO S L ARAExciting new developments are on the way, including the forthcoming IBC Practitioner’s Program. Like Austrian economics, IBC is surging to new levels of influence.

Economic Deep End

AN IDEA WHOSE TIME HAS COMEBY ROBERT P. MURPHYAmazing news! The CFA has officially added Austrian business cycle theory to its curriculum. It took a century, but the world is finally listening to Mises’ prescription for eliminating recessions.

PULSE ON THE MARKETPeter Schiff vs. Paul Krugman • Got Your Fiscal Parachute? • Hidden Tax Hikes • Manufacturing Slumping • Central Banker Musical Chairs

THE REAL CRASH IS STILL COMINgINTERVIEWPeter Schiff used Austrian analysis to predict the housing collapse and financial crisis back when people literally laughed in his face. But he says that was just a warm-up for what’s in store.

EvENTS ANDENgAgEMENTSLearn more in person from Lara, Murphy, and other Austrian economists, at these upcoming appearances.

LARA-MURPHY REPORTIt is the mark of wisdom to know the important things. As we prepare for the holiday insanity, let us not forget our duty in the struggle to preserve liberty.

One More Thing

IN EvERY ISSUE

Dear Readers

3 4 24

THIS MONTH’S FEATURES

126 17

OvErvIEw

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LMRL. Carlos Lara

Editor in ChiefDr. Robert P. Murphy

Executive Editor

Anne B. LaraStephanie Long

Managing EditorDesign Director

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A BO U T L A R A& M U R P H Y

L. CarLos Lara manages a consulting firm specializing in corporate trust services, business consulting and debtor-creditor relations. The firm’s primary service is working with companies in financial crisis. Serving business clients nationwide over a period of three decades, these engagements have involved companies in most major industries

including, manufacturing, distribution and retail. Lara incorporated his consulting company in 1976 and is headquartered in Nashville, Tennessee.

He married Anne H. Browning in 1970. Together they have three children and five grandchildren.

Dr. robert P. “bob” MurPhy received his Ph.D. in economics from New York University. After teaching for three years at Hillsdale College, Murphy left academia to work for Arthur Laffer’s investment firm. Murphy now runs his own consulting business and maintains an economics blog at ConsultingByRPM.com. He is the author of several economics books for the layperson, including The

Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009).

Murphy is Senior Economist at the Institute for Energy Research, and a Research Fellow with the Independent Institute. He lives in Nashville, TN.

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“It is the masses that determine the course of history, but its initial movement must start with the individual.”

- How Privatized Banking Really Works

“The customer is always right” is one of those all too familiar household phrases that is ingrained in the minds of most Americans. The holiday shopping season is one of those rare occasions of the year when we tend to remember it. What we seldom consider about this slogan is that it is the fundamental law of the market.

Too often we mistakenly attribute everlasting power to the capitalistic kingpins of large businesses, never realizing that they are in actuality the servants of the consumer and they must continue to serve the consumer or face going out of business. Consumers in reality are the powerful ones. They can make the poor wealthy and the wealthy poor.

The market is so precise and self-regulating that it seems almost miraculous in its operations, yet Mises emphasized that the market economy was not devised by a master mind and then set in motion, but in fact arose by “spontaneous actions of individuals” who are aiming to satisfy their own desires.

Murray Rothbard, in explaining these mystical workings of the market, referred to it as an “awe inspiring mechanism of harmony…gently but swiftly guiding the economic system toward the greatest possible satisfaction of the desires of all consumers.”

Of course the impressive nature of the market is most readily observed when it is unhampered and free. When government interferes with this wonderful process it can only create a negative effect, never a good one. Each step that moves society away from the free market economy is a step in the wrong direction that eventually leads to the destruction of economic life. Each step toward it leads to man’s freedom and liberty.

As we embark upon the annual hysteria of shopping, let’s remember to connect these important principles. Let us also consider increasing our efforts in spreading the free market message with greater conviction and determination in the New Year that approaches. With all of the trivial things on which we spend our time, surely we can devote more of our energies to this crucial task. The future outlook brightens when we realize we’re each doing our part to grow the 10% and that it’s working.

Yours truly,

Carlos and Bob

Dear readers3 L M R N o v E M B E r 2 0 1 2

Lara-Murphy report

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PAUL KRUgMAN RIDICULES PETER SCHIFFJust in time for our interview this issue, arch-Keynesian and Nobel laureate Paul Krugman on his popular New York Times blog ripped into Peter Schiff. First Krugman denied that Schiff had really deserved kudos for his predictions during the housing bubble (go to YouTube and watch “Peter Schiff was right” and see if you trust Krugman’s opinion). Then Krugman went further and said that Schiff and other Austrian commentators had been totally obliterated by the macro events since 2008. We’ll let Schiff speak for himself—we asked him about this specifically in the interview—but when it comes to people making erroneous statements that should discredit their macro models, let’s not forget this Krugman gem from a 2002 New York Times column: “To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” Oops.

Peter Schiff vs . Paul Krugm an

Recent develoPmentS that may be of InteReSt to ReadeRS of the laRa-muRPhy RePoRt…

Pulse on the Market

PuLSE On tHE MArkEt

WE ALREADY WENT OvER THE “FISCAL CLIFF”Most discussions of the looming “fiscal cliff ” seem to think that with just some tweaks, the government can resolve this crisis. Look: According to GAAP standards that we’d apply to a corporation with pension liabilities, the U.S. federal government is already insolvent to the tune of more than $38 trillion dollars (using a 75-year horizon). The CBO’s projection of its “alternative fiscal scenario”—in which the government keeps income tax rates where they currently are, keeps exempting middle-class Americans from the Alternative Minimum Tax, doesn’t reduce doctors’ reimbursements from Medicare, etc.—has the federal debt/GDP ratio exceeding 200% by the year 2038.

Got Your Fiscal Parachute?

OBAMACARE NOT JUST ABOUT gOODIESWhen thinking about the coming fiscal crisis, keep in mind that the “expiration of the Bush tax cuts” is not the only torpedo on the horizon. To pick just one example, the Affordable Care Act (aka “ObamaCare”) has a new 3.8% surtax on investment income for couples earning more than $250,000. Whether one subscribes to Austrian, Chicago School, or even Keynesian economics, the wave of tax-rate hikes coming in 2013 won’t be pretty for conventional measures of economic growth and job creation.

Hidden Tax Hikes

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Pulse on the Market

Recent develoPmentS that may be of InteReSt to ReadeRS of the laRa-muRPhy RePoRt…

PuLSE On tHE MArkEt

CAN WE SEND SCOUTS TO AUSTRIA?The financial press is in a tizzy with news that the Bank of England is “poaching” its new chief, Mark Carney, away from the central bank in Canada. This has led to all sorts of fawning over the best central bankers in the world, with many pundits lamenting that current rules prohibit the Federal Reserve from drawing on the talent in other countries. It’s odd that all of this talk is happening amidst the second greatest depression in modern world history, during the era of fiat money central banks. Remember that the official rationale for founding the Fed in 1913 was to help smooth out awful crises like the one that struck in 1907. How many modern Americans have ever heard about the panic of 1907? Not too many, because this was a crisis that was solved quickly by private lending and consolidation, with no formal central bank and with the federal government basically doing nothing.

Central Banker Musical Chairs

“NEW ORDERS” FALL OFF A CLIFFWe’re not sure of the exact reasons, but take a look at the “Manufacturers’ New Orders” of nondefense capital goods (excluding aircraft) at the St. Louis Fed website. (The label of the series is “NEWORDER”.) It’s a very sobering picture, showing that this category investment started falling off a cliff back in the summer. It’s currently down about 8% year/year. Looking at the chart over a ten-year interval, things do not look good for those who agree with the Austrian emphasis on the capital structure in the economy.

M anufacturing Slumping

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2013 IBC think tank

6

by L. Carlos Lara

2013 IBCThe Next Big Thing

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THINK TANKThe 2013 IBC Think Tank and Symposium will open

a new chapter of the Infinite Banking Conceptand the intellectual revolution it has started.

The 2013 IBC Think Tank and Symposium will opena new chapter of the Infinite Banking Conceptand the intellectual revolution it has started.

7 L M R N O V E M B E R 2 0 1 2

Ideas come from intellectuals and tend to filter through a hierarchy. They start in the realm of books and think tanks, and then through conferences, speeches, articles and reports, written specifically for the layperson, the audience expands. Soon the ideas begin to appear in newspaper editorials, and are aired over radio stations and television channels. Special interests may find the ideas to their liking and will help them along. Gradually, more and more people become aware of them. Politicians are the last to climb on board, but this is in essence the classic process of how public opinion is changed. The most

edly. Powered by an evangelical zeal, he has criss-crossed the nation personally delivering his message to audiences, sometimes twice in one week. His fa-mous best-selling book took his ideas from a few devoted followers to the nation. Nelson, at age 81—an age when most dream about retirement—has placed the Infinite Banking Concept on the cusp of a virtual explosion of future intellectual activity in the financial services industry. There is today be-cause of his efforts an enormous potential for IBC to grow exponentially because of the groundwork he has laid and by defining the footsteps we can all

2013 IBC think tank

NelsoN, AT Age 81 —an age when most dream about retirement—has placed the Infinite Banking Concept on the cusp of a virtual explosion of future intellectual activity in the financial services industry.

important principle behind influencing public opin-ion is the recognition that ideas take time to pro-duce change. The impact has a lag time. People with a vision who want important public policy changes need to be willing to make long-term investments and commitments. They must be patient. The story behind the Infinite Banking Concept (IBC) is not only one of patience, but one of perseverance.

When we speak of the societal changes IBC has created in the last decade and as it functions today, one man, R. Nelson Nash, has carried the entire hi-erarchal filtering process along almost singlehand-

follow. The 2013 IBC Think Tank and Symposium this coming February will pay tribute to his idea and great legacy as it opens a new chapter of the Infinite Banking Concept and the intellectual revolution it has started.

No oNe sHoUlD MIss THIs oNeThis coming year’s Symposium in Birmingham,

Alabama promises to be a landmark event that will signify a crucial turning point for all future sup-porter meetings of the Infinite Banking Concept. Never, since the think tank’s first gathering in 2005

8 L M R N O V E M B E R 2 0 1 2

who holds a PhD in economics from NYU will be the lead author of the teaching Manual, and Nelson Nash and I, contributing authors. The three of us will be the first instructors of the online classes.

The purpose of the school is two-fold. The need to organize IBC’s theory into a more structured teach-ing program stems primarily from the increasing visibility of its concept over the Internet that has spawned both interest and, unfortunately, misun-derstandings. Secondly, its increasing demand has created the need for the IBC Practitioner to be-come accredited and visible, not only as a benefit to the entire mutual life insurance industry, but also for the benefit of the general public. Now it is all being made possible by the academic, business and industry professionals that have come together and will be making it available to the financial services industry this coming February.

when only six people were in attendance, has there been so much anticipation and excitement over the new educational direction and impressive changes that will be formally introduced during this year’s event. The most obvious of these new changes will be the inauguration of the IBC’s Practitioner’s Program—the online school that will educate and endorse IBC financial professionals.

Consisting of a teaching manual, a series of on-line classes and an exam, the IBC Practitioner’s Program is in the stages of being prepared right now and scheduled to be finished for its debut at the February 2013 Think Tank. Enrollment is scheduled to open prior to that date and will be announced soon. Several academics, actuaries and business professionals are assisting IBC in a con-sulting capacity and will provide recommendations to help assure that the course material of the pro-

2013 IBC think tank

The most obvious of these new changes will be the inauguration of theIBC PRACTITIoNeR’s PRogRAM—the online school that will educate and endorse IBC financial professionals.

gram is written to meet all life insurance industry regulatory requirements. Further, and more impor-tantly, this group will help ensure that the material is actuarially correct. Although this committee will not actually have veto power over the program itself, their involvement will serve as an important guiding influence to assure the highest possible education standards are achieved. Our own Robert Murphy

AUsTRIAN eCoNoMICsThe certification program’s most unique and dis-

tinguishing educational feature will be Austrian Economics. The reason is quite obvious. IBC’s founder, Nelson Nash and the program’s authors and educators are themselves Austrians who firmly believe that the only way to properly advise clients is to understand how Austrian economics explains the

9 L M R N O V E M B E R 2 0 1 2

American financial system as it currently operates. For this reason, How Privatized Banking Really Works, which links IBC to Austrian Economics and the groundbreaking, Becoming Your Own Banker, will be the two official textbooks of the school’s pro-gram. This differentiating educational component will not only set the teaching curriculum completely

tion Program, plus other educational programs that are to be developed in the future. Part of the In-stitute’s reach will extend to IBC’s sister event, The Night of Clarity, in Nashville, Tennessee. The over-arching goal of the Institute is to commemorate R. Nelson Nash and the legacy of the Infinite Banking Concept. All this will be explained in detail at the

2013 IBC think tank

THe CeRTIFICATIoN PRogRAM’s most unique and distinguishing educational feature will be Austrian economics. The reason is quite obvious. IBC’s founder, Nelson Nash and the program’s authors and educators are themselves Austrians who firmly believe that the only way to properly advise clients is to understand how Austrian economics explains the American financial system as it currently operates.

apart from mainstream financial planning programs, but will also eliminate any attempts to compare IBC to a financial product selling system, or selling tool, for financial professionals. As a way to demonstrate the caliber of the curriculum, a sample lesson from the IBC Practitioner’s Program will be selected and taught live for the benefit of the audience at this coming event and should not be missed by anyone.

THe INFINITe BANKINg INsTITUTe

Another new innovation that will mark its begin-ning at the 2013 Think Tank is the Infinite Banking Institute, the umbrella organization that will house all these new educational components. The Infinite Banking Institute will actually manage all future IBC Think Tanks events, the new IBC Certifica-

February event along with the unveiling of the new redesigned IBC website.

Obviously, the IBC Think Tank is turning a major corner and we are encouraging all IBC supporters everywhere to be sure to be present for this one.

soMe oF THe olD, BUT MANY THINgs NeW

Certainly not all things at the 2013 IBC Think Tank will be brand new. By default, much of the old IBC think tank will still be present. The important thing to realize is that this event promises to have the comfortable camaraderie of IBC supporters of previous events combined with a mixture of bold new ideas that will make for an exciting experience for everyone.

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For all of us that have attended in the past we can each share a story of our first time at an IBC Think Tank. I recall my own first visit in 2007. The en-tire experience totally confounded me. I had a vague definition of a think tank in mind, but this is not what I was met with. In that year I heard strange things being said inside those walls that I did not understand, but the IBC Think Tank has undergone a great deal of change since then and I have changed too, or I should say, IBC changed me. Whatever happened, the IBC Think Tank is certainly not any-thing like that today. David Stearns, CEO of the Infinite Banking Concepts, LLC, explains that the original think tank agenda has been an evolving pro-cess from its original form with much of the change

brought on by the immense growth and popularity of Nelson’s concept. Each year there has been an attempt to formalize its principles and its teaching methodologies to avoid confusion and misrepresen-tations. Each year it has made progress in those di-rections.

CReATINg A PoWeRFUl eNgINe FoR soCIAl CHANge

The greatest turning point of all occurred to all of us in the fall of 2008 with the financial crisis that rocked the nation and the world. That event set the stage for the giant footprint IBC would inevitably

2013 IBC think tank

Fractional Reserve Banking

Federal Reserve

Sets Fed Fund Rate

Discount Rate

Buys the Bonds (Credits Reserve Account by $1 million)

Overnight

Fund Rate

Sells IOU’s: BONDS ($1 MILLION) Excess Reserves

Above 10% of Deposits

Commercial Bank

Commercial Bank

Deficit Reserves Below 10% of Deposits

Can Not Extend Credit / Loans Prime

Rate Expands Credit / Loans

Businesses

Individuals

- 10%

11 L M R N O V E M B E R 2 0 1 2

make with Austrian Economics. Five short months after the crash (IBC Think Tank February 2009) at the invitation of Nelson and David, I presented the Austrian’s explanation for the crisis to the IBC au-dience present that year. Up to that point, no one knew what had happened—not Washington, DC, not the media and not even the bankers who had caused it. They were all still trying to figure it out. The Austrians, on the other hand, knew exactly what had happened and had been expecting it. By explaining the subject of money and banking from its origins to the present Federal Reserve’s fractional reserve banking system, the final link to IBC’s true message was finally made. That footprint has grown wider and deeper in the ensuing years. Today, with the potential of an even larger economic upheaval looming, IBC is poised to meet this challenge head on with a new cadre of qualified IBC Practitioners schooled in Austrian economics.

If you have not made plans to attend this coming year’s IBC Think Tank and Symposium, let me en-courage you to make your reservation today. This is an experience you cannot afford to miss.

CoNClUsIoNMost think tanks are run as nonprofit organiza-

tions, but today’s IBC Think Tank, and now over-arching Infinite Banking Institute, is poised to run like a successful for-profit business and sees itself as a collaboration of intellectual entrepreneurs in the business of marketing ideas. Its main focus will re-main grounded in education. Its target audience is the IBC Practitioner and the general public. IBC may have started from a tiny seed of an idea, but there is no stopping its growth now. The future belongs to Privatized Banking and the IBC Practitioner.

2013 IBC think tank

Today, with thepotential of an evenlARgeR eCoNoMICUPHeAVAl looMINgIBC is poised to meet thischallenge head on with anew cadre of qualified IBC Practitioners schooled inAustrian economics.

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An Idea whose time Has Come

You Can’t

by robert p. murphy

Austrian Business Cycle Theory:

STOPan ideawhose

time Has

COME.

12 L M R N o v E M B E r 2 0 1 2

13 L M R N O V E M B E R 2 0 1 2

A few weeks ago several Austrian economists (including me) received an email from an excited proponent of the School informing us that the Chartered Financial Analyst (CFA) exam now contained material on Austrian business cycle theory. I’ll reproduce Peter Klein’s blog post summarizing the good news:

A friend informs me that the mainstream and prestigious CFA Institute now features Austrian economics in the study materials for the Level 1 CFA Exam. The section “Theories of the Business Cycle” includes several pages on Mises and Hayek (as well as Schumpeter), and they’re pretty good. “As a result of manipulating interest rates, the economy exhibits fluctuations that would not have happened otherwise. Therefore, Austrian economists advocate limited government intervention in the economy, lest the government cause a boom-and-bust cycle. The best thing to do in the recession phase is to allow the necessary market adjustment to take place as quickly as possible.” About 100,000 people take this exam each year, and now they are all being exposed to Austrian teaching.

A quick search of the CFA Institute website turns up  several Austrian-friendly items, including a chapter from the 2011 book Boombustology that opens with a quote from Mises.1

This welcome event is just another milestone in the growing popularity of the Mises-Hayek theory of the trade cycle. I am not that old, and I remember being elated when I met Richard Ebeling (economics professor at Hillsdale College) as a high school student looking at various colleges. I was elated because Ebeling at that point was the only other living person I knew who had read Mises’ Human Action!

In a similar vein, when I first began going to the Mises Institute in Auburn, Alabama for their summer programs, it felt like we were members of a secret society. Many of us were overjoyed to be in a room full of people who had even heard of Mises and Murray Rothbard.

Yet over the years, the attendance at Mises events kept growing, and the students started looking more and more “normal.” The ratio of males to females even moved toward 50/50, something that would have been inconceivable in the early years.

Of course, the real popularity of Austrian economics, and Austrian business cycle theory in particular, took off with the collapse of the housing bubble. All of a sudden, it seemed that everybody in the financial sector wanted to know what the Austrians had to say. I can testify from firsthand experience that my phone (and email inbox) was very busy in late 2008 and through 2009, as the Keynesian and Chicago School paradigms pushed the government into running trillion-dollar deficits while

An Idea whose time Has Come

“The mainstream & prestigiousCFA (Chartered Financial Analyst)

Institute now features Austrian economics in the study materials for the Level 1

CFA exam. [It] includes several pages on Mises and Hayek (as well as Shumpter)

and they’re pretty good.”

13 L M R N o v E M B E r 2 0 1 2

A

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Ben Bernanke was inflating more than all previous Fed chairs combined.

In those turbulent times, regular Joes were naturally attracted to the Austrians, because they were the only economists who were speaking common sense. Of the major schools of thought, only the Austrians were consistently proclaiming that if the problem was a housing bubble, then the solution was to let home prices fall—not to slash interest rates to zero, and enact all sorts of other programs, to boost spending on real estate. The Austrians were virtually the only ones (with a few notable exceptions) who stressed that the federal government as well as the average household needed to slash spending and save more, as a way to counteract the consumption binge of the bubble years.

LudwIg vOn MISES’ THEOry OF THE TrAdE CyCLE

In his classic 1912 German-language work, which has been translated as The Theory of Money and Credit, Mises laid out what he called “the circulation credit theory of the trade cycle.” Far from blaming what we now call “the business cycle” on capitalism per se, Mises

blamed it on credit expansion by the commercial banks.

Specifically, because they operate on a fractional reserve basis, commercial banks actually create money

An Idea whose time Has Come

In the Austrian view, the market rate of interest performs a vital service.

In those turbulent times,regular Joes were naturally attracted

to the Austrians, because they were the only economists who were speaking

common sense.

14 L M R N o v E M B E r 2 0 1 2

when they extend loans to borrowers. (Carlos and I walk through the mechanics of this—down to step-by-step transformations of a bank’s balance sheet—in our book, How Privatized Banking Really Works.) This creation of new money that is not connected with someone’s deposit means that the banking system is effectively trying to lend out more money than households have genuinely saved. Consequently the rate of interest drops below the “natural” rate, which would correspond to the amount of actual savings.

In the Austrian view, the market rate of interest performs a vital service. It guides entrepreneurs as they allocate scarce resources among different projects, which have varying durations and amount of physical output.

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In general, consumers would rather get more output than less, but they would also rather get it sooner than later. The interest rate helps entrepreneurs make investment decisions in light of these tradeoffs. A very high interest effectively signals that the consumers are relatively “impatient,” and so projects are penalized heavily if they tie up funds for a long period. On the other hand, a low interest rate can make a long-term project appear profitable, because its future revenues are discounted at a lower rate.

Mises argued that the commercial banks, through inflation, pushed interest rates below the correct, natural level and thereby misled the entrepreneurs into starting long-term projects for which the economy lacked adequate capital goods to complete. Thus the boom period was physically unsustainable. The artificially low interest rates would give the temporary illusion of prosperity, but only at the cost of a future bust.

THE HOuSIng BuBBLE And BuSTMises’ theory of the business cycle has been around

for a full century this year. And yet, it wasn’t until the collapse of the housing bubble and the ensuing financial panic in 2008 that regular investors began paying attention. On the one hand, this is understandable:

The average Joe had no reason to doubt the “experts” at Harvard, CNBC, the Fed, and Wall Street when things were going well. But when the conventional wisdom led to catastrophe—and moreover, catastrophe that precious

An Idea whose time Has Come

It is the unique contributionof the Austrians to show that inflation

has another perverse effect, namely it distorts interest rates and causes the

dreaded boom-bust cycle.

15 L M R N o v E M B E r 2 0 1 2

Thus the boom period was physically unsustainable.

few of the gurus saw coming—all of a sudden people were willing to listen to those who had historically been excluded from the conversation.

The fact is, it’s not surprising that the other mainstream schools of thought had trouble seeing the brewing crisis. If one believed in the standard monetarist view of history, then Alan Greenspan had done a fine job as Fed chairman. There was certainly nothing in the conventional measures of CPI during the early and mid-2000s that would indicate a massive monetary-induced bubble in housing and the stock market. (In contrast, monetary policy was clearly too “loose” during the 1970s.)

Yet Mises and Hayek argued that the Chicago School emphasis on consumer price stability was a dangerous

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setting up an unsustainable boom. That is in fact precisely what happened during the 1920s.

COnCLuSIOnThe Austrian School economists are not the

only ones to worry about overly aggressive monetary policy. However, other economists typically worry about inflation in terms of rising consumer prices. It is the unique contribution of the Austrians to show that inflation has another perverse effect, namely it distorts interest rates and causes the dreaded boom-bust cycle.

It is important for financial professionals to understand at least the basics of Austrian business cycle theory. The CFA Institute has recognized this fact, as reflected in their decision to include the material in their exam.

Likewise, the Infinite Banking Institute in Birmingham, Alabama is launching a certification program for IBC Practitioners in early 2013. Carlos and I, along with Nelson Nash and David Stearns, are designing the program, giving it a heavy emphasis on Austrian economics. In our view, Austrian economics is correct economics, and especially in our times any financial professional needs to know the Austrian view in order to properly advise clients.

The topics of fractional reserve banking, gold vs. paper money, and business cycle theory can be quite intimidating, but they are also crucial for every financially responsible adult to understand. Carlos and I wrote our book with the layperson in mind, knowing that these ideas were too important to leave to the economics textbooks. For those readers who are not familiar with the Austrian School, and especially if you are a financial professional who helps clients with their money, I strongly encourage you to read our book. The beginning is downright scary, where we lay out the problem, but we also provide a solution for both the country and the individual household.

distraction. During the 1920s too, most economists were caught flat-footed by the sudden collapse in asset prices. Irving Fisher, the intellectual grandfather of many of the ideas of today’s monetarists (fans of Milton Friedman), infamously claimed on October 15, 1929 that the Dow Jones stock index had achieved a “permanently high plateau.” A mere nine days later on “Black Thursday,” the market dropped 11 percent!2

My focus on Irving Fisher isn’t to make fun of someone who made a horrendous “call” on the stock market. Rather, the point is to underscore the importance of Austrian business cycle theory. Fisher had

An Idea whose time Has Come

Bibliography

1.Peter Klein, “Austrian Business Cycle Theory on the CFA Exam,” Bastiat Circle blog post, November 12, 2012, at: http://bastiat.mises.org/2012/11/austrian-business-cycle-theory-on-the-cfa-exam/. 2.See: http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929#Timeline.

This welcome event is just another milestone in the growing

popularity of the Mises-Hayek theory of the trade cycle.

every reason to believe that the U.S. economy was built on strong fundamentals in late 1929, because the Fed had been conducting its affairs largely the way Fisher would have wanted. In particular, consumer prices were extremely stable from 1922 onward. So from a Fisherite perspective, the central bank was doing everything necessary to promote stability.

Yet Mises and Hayek knew better. They specifically warned in writings of the day—before the Crash occurred—that Fisher’s stabilization ideas could sow the seeds for disaster. In an economy with rising productivity and output, a fixed money stock would actually imply falling prices over time. Thus, in this context Fisher’s call for stable prices would imply a constant influx of monetary inflation. If that inflation entered the system through the credit markets, then it would cause the market rate of interest to fall below the natural rate,

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the real Crash Is Still Coming

THE REAL CRASHIS STILL COMING

Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Capital, a registered broker-dealer which specializes in foreign securities. He is recognized for his knowledge of the foreign securities markets as well as the currency and gold markets. Mr. Schiff delivers lectures at major economic and investment conferences, and is quoted often in the Wall Street Journal, New York Times, LA Times, Barron’s, BusinessWeek, Time and Fortune. His broadcast credits include regular guest appearances on cable, as well as hosting a syndicated daily radio show, The Peter Schiff Show. He has written four bestselling books, including his latest, The Real Crash: How To Save Yourself and Your Country, and the illustrated parable, How an Economy Grows and Why It Crashes.

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THE REAL CRASHIS STILL COMING

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Lara-Murphy Report: How did you discover Austrian economics? Peter Schiff: It discovered me, probably from my dad. He didn’t express it as “Austrian economics.” He just called it economics. I later learned it as “Austrian economics.” When I discovered it, it was a philosophy that I already believed in. Eventually I learned some new stuff, of course, but what people call “Austrian economics” was something I already believed in, though I didn’t know that was the name for it.

LMR: You open your latest book, The Real Crash, by explaining that people who congratulate you on calling the 2008 crash, don’t realize the big picture. Can you explain? PS: Well, it’s not like people come up to me on the street and say that. What I meant was that a lot of people will say to me in interviews, “You called the crash, now what?” The crash that happened in ’08 was not what my 2007 book Crash Proof: How to Profit From the Coming Economic Collapse was about. The economy hasn’t collapsed yet. The collapse began in 2008, but it hasn’t ended yet. Most of the

damage is in the future, not in the past. My 2007 book was about what would be set in motion. I did see the consequences of the collapsing housing bubble, the failing banks, and so forth. In that sense I did “call” the 2008 crisis. But that was not the economic collapse. That was the event that would ultimately produce the economic collapse. But so far, it’s playing out according to my script.

Now, what I was afraid of, was that knowing how bad the 2008 crisis would be, I extrapolated what the government’s response would be. So it would be the “cure” that would really kill us, even though the disease too would be bad. I think we are headed for that crash now; we’re not there yet. That crash will occur when we see a spike in interest rates and/or a drop in the USD. One of those things is coming, if not both.

Everyone is now talking about the fiscal cliff, as if that’s going to be Armageddon. But we’re better off going over the cliff than staying on our present course. Yet this isn’t really a “cliff.” This is nothing compared to what we need to do. What people mean by the “fiscal cliff ” is raising taxes, as opposed to going deeper into debt. Raising taxes is bad, but

the real Crash Is Still Coming

”Austrian Economics discovered me, probably from my dad. He didn’t express it as “Austrian economics.” He just called it economics.

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it’s better than delaying the pain by funding our government spending through more borrowing. Our government is very expensive, and people don’t realize its true cost when it just keeps racking up debt. We need to slash spending. Paying for our current level of government by continually going deeper into debt will only hurt more in the long run.

LMR: The biggest complaint against the hard-money Austrian crowd is that they warned about “hyperinflation” from 2009 onward, and yet they have been repeatedly refuted by the facts. Paul Krugman in particular has gotten dizzy he’s run so many victory laps on this score. What do you say in response?

PS: Krugman hasn’t called anything. He points to government barometers as proof that he’s right. I think the government isn’t accurately picking up how much inflation there has been. I’ve been pointing to a poll showing that inflation was the public’s #1 economic concern, not employment, housing, or taxes. Why is everyone so worried about this, if Krugman is right? It’s because they’re worried about what they can see. I agree we haven’t had hyperinflation yet. And I haven’t said hyperinflation is a sure thing, I just said if we continue on our present path of government policies, we eventually will have hyperinflation.

What are the forces currently keeping severe inflation at bay? The dollar right now is still the world’s reserve currency. We can still export our inflation effectively. Other countries print their own currency based on dollar reserves, meaning we effectively pay for our trade deficit by shipping dollars to the rest of the world. But we can’t do that indefinitely. Eventually the rest of the world will tire of sending us real goods in exchange for our dollars. At that point, they will unload their massive dollar reserves which will come back to the US. Then it will hit us like a tidal wave. It’s all a question of timing. Yeah, Krugman can look right for a while, but then we get clobbered with the consequences of his policies. Doesn’t mean he was right.

Look, I said the Obama stimulus wasn’t going

the real Crash Is Still Coming

”I’ve been pointing to a poll showing that inflation was the public’s #1 economic concern, not employment, housing, or taxes. Why is everyone so worried about this, if Krugman is right?

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You would think given the fact that I’d gotten it right, when so many others were dead wrong, would make my stock higher. Maybe it’s because there are more bears now, so I’m not as unusual, whereas I was more isolated back in 2006. But I also think it’s because the major American networks today want to be able to make fun of the bear. So they’d rather interview a bear who doesn’t have as much credibility, so they can paint him as a fool. They also know that if I go on, I have a fan base and somebody will capture the interview and put it up on YouTube. So if their efforts to paint today’s bears as fools end up being dead wrong, they will be memorialized forever on YouTube, and they don’t want to risk that. That’s why they’ll ask some other guy to be the “token bear” on their shows, rather than me. It’s safer from their perspective.

LMR: Of course the interested reader should buy your book (the Real Crash) for the full details, but can you give a quick synopsis of your recommendations for the average American household, in these turbulent times? We assume you don’t recommend following the advice of the gurus, and keeping one’s retirement in US-equity-based mutual funds?

to work, and it hasn’t. The government statistics aren’t the best barometer, because they’re wrong. If inflation has in reality been higher than the statistics say, then the “real growth” shown by the official statistics has been lower, and we’ve been in recession during the whole Obama presidency. Eventually you’re going to see 5 – 10% increases in the official CPI statistics or more. But by that time, in order for the government to admit such figures, actual prices will be rising more than 20% year/year.

LMR: There are many clips of you on CNBC literally being laughed at in 2006 by pundits who said there was no housing bubble. Do you feel the same way now, when people dismiss your warnings about Treasuries and the US dollar? PS: Yeah it’s similar. I don’t have more credibility now than back then. The irony is that now I get invited less than I did back then. Bloomberg hasn’t had me on in 4 years. All my TV appearances are down, except for international appearances. So I’ve got more notoriety with foreign media than domestic. I still do interviews on Fox and CNBC, but CNN and Bloomberg have totally dialed me back.

the real Crash Is Still Coming

”We need to slash spending. Paying for our current level of government by continually going deeper into debt will only hurt more in the long run.

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the real Crash Is Still Coming

PS: I would recommend the average household get out of US assets in general, dollar-denominated ones in particular. The most dangerous thing to hold are long-term bonds (Treasuries, munis, US corporate bonds, cash-value life insurance). You want to own gold and silver, and have exposure to foreign equities. My firm can help them manage if they are interested. I also have seven mutual funds that have strategies that should do well if my worldview is correct. These funds should also do well even if the US economy never collapses. It’s just that if it does collapse, then my funds will really shine.

LMR: In 2010 you tried to run as a Republican for a Senate seat in Connecticut, but lost in the primary. Can you offer any reflections on your experience, and in particular if you think people who love liberty should focus on politics or some other avenue?

PS: Politics is definitely difficult. I started with the Senate, so someone might instead try a House or state-level position. The problem with the country is that every election cycle, the electorate is more dependent on the government. There are more people dependent on food stamps than ever before. The government itself creates and perpetuates the poverty that in turn causes people to seek government relief. People don’t recognize the

connection, that without government they could have private-sector jobs and not need food stamps. Every cycle this becomes stronger, making it harder for free-market candidates to win elections. We’ve now reached the point where there are more people riding in the wagon than pulling it. It’s no wonder that in a democracy so many people want to tax the rich.

It’s not impossible. There are pockets and districts where this dynamic won’t dominate. I was in Connecticut, which is pretty liberal. The Republican establishment here keeps running a RINO [Republican In Name Only—eds.]. But I don’t think a RINO can win either, because if you’re trying to outpromise the Democrats you can’t win, because you look like a hypocrite or liar. Only way you can win in a place like this is to run a real alternative. So the free-market candidate here needs to focus his campaign not on the welfare recipient, but on the voter supporting the welfare recipient. It’s true that free-market policies would help the welfare recipient by giving him a better shot at getting a good job and becoming self-sufficient, but you still aren’t going to convince him of that in a 30-second commercial. I mean, there are people voting who can barely read.

”We’ve now reached the point where there are more people riding in the wagon than pulling it. It’s no wonder that in a democracy so many people want to tax the rich.

Events andEngagements

2013February 6-8 • Birmingham, AL

Lara and Murphy present on Certification Programat Infinite Banking Concept Think Tank

•

January 26 • Houston, TXMurphy speaks at Mises Circle

Some events may be closed to general public. For more information: LMrevents@usatrustonline.com

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23 L M R N O V E M B E R 2 0 1 2LMR SEPTEMBEr 201023

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