In this episode, Max Keiser and Stacy Herbert discuss unknown people whose solvency is uncertain operating faster than the speed of light in the “franken-market” and Max Keiser asks, “what if a high frequency trading algo bot shrugged?” In the second half of the show, Max Keiser talks to Sandeep Jaitly of feketeresearch.com about the real Austrian economics of Carl Menger versus the fake Austrian economics of Ludwig von Mises. They also discuss how Ben Bernanke’s confusion about what money, how central banks are leading us into a second dark age and gold as the ultimate exinguisher of credit. Max and Sandeep also highlight the reason why rehypothecation in London is fraud. And, finally, Max hopes Lew Rockwell watches and learns.
KEISER: Hi I’m Max Keiser, time now to go to London and talk with Sandeep Jaitly of BullionBasis.com. Sandeep lectures throughout the world on Austrian Economics. Sandeep, welcome back to the Keiser Report.
JAITLY: Thanks very much, Max.
KEISER: Sandeep, I wanted to get you back on because you tweeted recently and I quote, “If it ain’t Menger or his direct student Eugene Von BB, it ain’t Austrian. Sorry #Mises : respectfully, too many mistakes were made.” Now the reason I wanted you to comment on this is that many Americans consider themselves Austrian school libertarians, but most will be following Mises. What are his mistakes?
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JAITLY: I think his mistakes are probably too great to elaborate on sort of on the show, but essentially Mises didn’t look back to Menger’s original axiom which was that value is not outside of your own consciousness. And he didn’t observe what Menger observed about market action in the sense that there are always two prices, there’s a bid and an offer. And von Mises didn’t like to admit that interest was a market phenomenon. He sort of wanted to imply that it’s a sort of natural consequence of not having a present good basically. So to develop a theory of interest without going back to Menger’s original observations is not continuing the tradition in the Austrian way as we would see it. It’s not insulting or denigrating what von Mises has done. He was certainly the greatest economists of the twentieth century. It’s just that he made a slight, few errors of observation. That’s all.
KEISER: Well, the reason why this is interesting and I’m bringing it up here is that this idea that value does not exist outside of mankind’s consciousness, this is pretty much the opposite of objectivism which is Ayn Rand’s philosophy . . .
KEISER: . . . to which many American libertarians adhere and they cite von Mises as their justification . . .
KEISER: . . . so this idea of objectivism is diametrically opposed to the true Austrian School of Economics . . .
KEISER: . . . so that would be a fundamental flaw in any so-called libertarian’s philosophy.
JAITLY: Absolutely. And the amount of guff that you read that tries to associate itself with Austrian economics and Ayn Rand . . . I mean, it’s remarkable. Von Mises himself made the mistake of confusing the thing that occupies and object with the object itself. So he made the mistake of saying that a promise to gold is exactly the same as the object of a promise to gold. And if you stop and sort of think about it, that isn’t quite true. And the same applies for the whole philosophy of Austrian economics generally. Gold does not have intrinsic value per se. It has value because it satisfies human ends and it’s the means by which those ends are satisfied. It doesn’t have value in and of itself and that’s a big mistake that a lot of libertarians or people who call themselves ‘libertarian’ make.
KEISER: Right, I wanted to also ask your thoughts on what I call ‘fake libertarianism’ because you hear a lot of folks in the US who ascribe to von Mises – purportedly – but they’re actually when you scratch the surface more of the fake libertarian variety. And this comes up quite noticeably – this I would imagine is related to price discovery and what you’re talking about bid-offer and interest rates – they don’t include certain externalities, the actual use of force, which, of course, would be against the whole idea of libertarianism . . .
JAITLY: Oh yeah.
KEISER: . . . to realise an economic gain. So, in other words, when you have companies that are supposedly free market who are in the oil business and they don’t include the externalities of the pollution that they’re creating or the cost of that pollution, they are by force subjecting other people downstream to deal with the consequences and, in many cases, deadly consequences of the force of those externalities being pushed on those people. So again, a major failure by libertarianism . . .
KEISER: . . . if, in fact, it’s supposed to be associated with these ideas of von Mises and free markets, etc. What are your thoughts?
JAITLY: Max, I don’t want to paint a bad picture of von Mises. I mean, it’s a perfectly honest mistake to make, confusing the object with the ends that it is satisfying. But it’s not a mistake that I expected someone like von Mises to weave into his economic theory so masterfully. So that’s all I will say on von Mises.
KEISER: Okay, well if you strip these things away from the current crop of libertarians in the US that are informing the Ayn Rand school, the Paul Ryans who are now on the Republican ticket, they’re not really libertarians.
KEISER: They’re not really Austrian economists.
JAITLY: Absolutely not.
KEISER: What are they? They’re fake. What are they? What would you call these people?
JAITLY: I don’t know. I mean I haven’t really given much thought to what I would name these people, but Austrian economist is certainly not one of them by a very large measure. I have to give it some thought but it won’t be a kind nomenclature, let’s just put it that way. (laughs)
KEISER: Alright now Sandeep, in your latest Bullion Basis newsletter you write, “Money is gold and silver. Money is nothing else.” And yet when Ron Paul asked Ben Bernanke whether gold is money, the Chairman responded, “No. It’s a precious metal.” What’s going on there?
JAITLY: Well, respectively, Dr. Bernanke is wrong in that regard. But he’s not unique by any measure. Money is the universally acceptable ultimate extinguisher of any debt and, as far as I can tell, fiat credit which is the system that we have currently, doesn’t fit that bill. Throughout time, the universally accepted extinguisher of any debt has always been . . . ultimate extinguisher I should add . . . has always been gold or silver. Nothing else. That is the definition of money. So it doesn’t take much thought to realise that Dr. Bernanke is wrong. Plain and simple. He’s wrong.
KEISER: Alright, so we have clear evidence of this because the US has a debt problem and Ben Bernanke’s solution over there at the Fed is to adjust monetary policy, attempting to extinguish the debt not with gold and silver but with more debt.
KEISER: What he’s doing cannot be considered money.
JAITLY No. No. Not at all. You can’t extinguish credit by issuing more credit. You just end up with a larger amount of credit outstanding. I don’t know whether Dr. Bernanke realises this in the back of his head – I’m sure he does, he’s not a dumb individual – but the consequences of what he’s doing, I don’t think he does realise, or, in fact, any country that’s monetising their debt to this degree. They do not realise the consequences of they’re doing and there will be nothing that they can do once everything starts kicking off, once everything starts spinning. What I want to make very clear Max is that you don’t need marginal quantitative easing from here for asset prices to start escalating. You only need what has already been printed to start spinning more quickly. And once things start spinning, nothing can slow it down. No central bank will be able to slow it down without sending the whole world economy into the second dark ages.
KEISER: Alright now, of course, if you take post world war 2 American economy, there’s always been this tension between escalation of debt and GDP growth and for decades there was on balance GDP growth in spite of the escalating debt, so for awhile, America was able to get away with this escalating debt, but now we see a period where what’s happening is directly outlined in the Austrian school of economics is that when you achieve a certain debt saturation point, you enter into a debt spiral and the attempt is to satisfy or extinguish the debt with more debt which creates this debt trap . . .
KEISER: . . . and is that . . . in Menger’s view, was he the first to articulate that aspect of the Austrian school?
JAITLY: Oh no, Menger was never that market-orientated or that specific in his observations because you must remember that the time that he was writing none of the shenanigans what we’re currently doing were happening. There was still a gold standard. There were some issues with silver in Austria specifically to do with Menger and the Austrian empire but Menger couldn’t even comprehend what we’re currently doing, so it wasn’t on his spectrum. It was on the spectrum of the later so-called Austrian economists like von Mises . . .
KEISER: So let me jump in here for a second, so we see the break then from Menger to von Mises really as we go from a world of gold to a world of fiat banking
KEISER: . . . and fractional reserve banking where von Mises has attempted to shoe-horn Menger’s ideas into a new philosophy which is interesting in its own right but you can’t really confuse it with real Austrian school economics.
JAITLY: No you can’t. And another thing that people often get wrong is that once you have gold and silver, which is, as I said before, the universally accepted ultimate extinguisher of any debt, all of the obligations that you have that come across during the course of business are denominated in gold. And those obligations that are closest to expiry, to liquidation into gold, you can count as near money not money. And those instruments which take a long time to liquidate into gold, like Treasury bonds or long term corporate debt, is less money like. So the amount of obligations, the amount of credit in the system, has no restriction to it per se. It’s only bounded by how productive, how innovative we are as a species. So extending credit does not cause boom and bust cycles, it’s when you extend credit beyond the duration for which it was intended. And that we actually understand more colloquially as borrowing short to lend long. It’s when you don’t match the purpose to which the credit was taken with the purpose to which the credit was granted, basically. That is a much bigger problem.
KEISER: Well let’s take that a step further because in London now, banks in London are under extreme pressure, having been exposed to the scandal of rehypothecation. Forget about matching your short and long credit obligations, they’re re-loaning the same security out an infinite number of times . . .
KEISER: . . . leading to a total collapse in the UK banking system and economy. So it’s beyond even the mismatch of obligations, it’s become an outright fraud . . .
JAITLY: Yes it’s fraud . . .
KEISER: . . . where there is no collateral whatsoever.
JAITLY: It is fraud. Borrowing short to lend long is fraud because you’re disobeying the principles of bailment which is that a demand deposit should be available at all times so you can’t have your money available at all times and earn interest on it. The two don’t make sense yet we the people are willing to accept things like this without questioning them, so we get what we deserve in the end.