Government Interference and Investing
Transcription of interview with Thomas Woods on January 2, 2012.
Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor
Thomas Woods has written 11 books and is a bestselling author.
He wrote a book called Meltdown, in which he described the financial crisis in 2007
to 2010 in accordance with whatís known as the theory of the Austrian School of Economics.
Douglas Goldstein, financial planner & investment advisor, interviewed Woods on Arutz Sheva
Radio.
Thomas Woods: The so-called Austrian School of Economics is gaining tremendous traction
in the United States and to a lesser extent in Europe these days.
The Austrian School is not a physical place.
Itís a school of thought and itís only tangentially related to Austria.
The economists who belong to that school vastly disproportionately to their numbers predicted
this financial crisis and thatís why suddenly this school, which has been very much out
of fashion, is suddenly attracting a lot of interest.
How do they know?
Are they just soothsayers?
How could they have predicted that this would happen?
What the Austrians are by and large saying is that whatís relevant to us now is that
when central banks all over the world, like the Federal Reserve System in the U.S., intervene
in the economy and push interest rates lower supposedly to stimulate economic activity,
it does stimulate some types of economic activity but not activities that are sustainable in
the long run.
They in effect encourage entrepreneurs to make investments that they wouldíve made
otherwise if the interest rates werenít so low, so it causes resources to go into channels
where they wouldnít normally have flowed.
What the Austrian theory shows is that this sends the economy onto a path where itís
configured incorrectly.
Consumers are demanding more consumer goods, but more and more resources are being plowed
into long term capital good.
It surely encourages activity, but itís not activity for its own sake that we want in
the economy.
Itís not jobs for their own sake that we want in the economy, it is production geared
toward consumer wants.
When you interfere with interest rates, you cause entrepreneurs, investors, and consumers
to commit errors and to do things they would not have done.
Douglas Goldstein: When you say ëinterfere in interest rates,í is that as opposed to
simply letting the free market decide what the interest rate should be?
Thomas Woods: Exactly.
Ultimately, itís like any other sort of price control.
If you interfere with the price of milk because you think youíre helping things by lowering
the price of milk, youíre not because if you pass some law saying milk could be 10
cents a gallon, the result is going to be that everybodyís going to want milk and no
oneís going to supply it.
So itís not enough to say that your intentions are good.
The free market ought to just let things alone, so that interest rates reflect peopleís savings.
Then, when people save a lot thatís when interest rates are supposed to be low because
people are deferring their consumption, and thatís when investment is supposed to take
place.
But, instead, what we have is people like Allan Greenspan, the former Fed Chairman,
in 2001 pushing interest rates downward 11 times and the result was that instead of Americans
correcting the errors of the past and saying weíre way too invested in housing, this is
just crazy, interest rates wouldíve shut up on their own eventually and people would
have stopped speculating in real estate and they wouldíve gone into something else.
But when the free market was trying to give us some red lights, every light was green
coming from Greenspan, and so people just persisted in these errors so that when the
crash came, the crash was much worse than it wouldíve been if we had made the corrections
sooner.
Douglas Goldstein: Are there any examples of countries where there is no central bank
setting interest rate policy?
Thomas Woods: To my knowledge, there isnít.
There are some countries that more or less aped the U.S.
I donít think Panama has a central bank, for instance, but theyíre more or less using
the U.S. currency, so their economy is deeply tied to the U.S. Basically today, it has swept
the board that you need to have a central institution that is in charge of money and
interest rates, but what we, in the Austrian School, argue is that this is the heart of
the economy.
Half of every transaction is money.
Money for hats, money for shoes, money for something, and when you interfere there, youíre
creating a lot of white noise in the background when people are trying to calculate, ìIs
this investment going to earn me a profit?
Is this investment going to turn a loss?î It becomes harder to calculate that when youíve
got all this white noise confusing your calculation.
Douglas Goldstein: Itís obviously a radical idea, because no one is doing it.
Itís also kind of impossible just to test it, isnít it?
How about Saudi Arabia?
Thomas Woods: Sure, if they prosper, weíll know that was the right thing to do, but what
I showed in Meltdown is that when the United States had a major economic downturn in 1920
or 1921, double digit unemployment, production down by 30%, just a disaster, it was not because
the federal reserve pumped money into the economy that things turned around.
The fed was almost entirely absent in that crisis and the federal government actually
cut its budget in half, so they did exactly the opposite of what every stimulus-crazed
economist today would recommend, and the result was one of the most robust economies that
the U.S. has ever seen.
That is some indication that all that this interference in the economy does is blow up
bubbles.
It was a stock market bubble in the 1990s TEX stocks.
It was a housing bubble in 2000s.
If we want to do something about these bubbles, we could go after the institution that keeps
pumping the air into them.
Douglas Goldstein: Given the way the government is set up today, what could be done to avoid
whatever that next bubble might be?
Thomas Woods: I would say right now if investors arenít chastened after whatís just happened
to them, I mean not only just over the past few years but the S&P since 2000 has barely
recovered if at all, that everybody should be cautious about the next big thing.
I would just be careful about the Federal Reserve lowering interest rates and in fact,
itís not even so much because the fed is even pushing them.
Just right now, thereís no demand for borrowing and for funds because in this atmosphere of
uncertainty, nobody wants to expand, nobody knows what the regime in Washington is going
to do next.
Nobody knows and they look at Europe and the slow motion collapse that is taking place
over there, and very few people want to borrow in the first place.
I mean, you could throw the money at them and they donít want to even take it.
Just use caution.
When you look back at the 1990s, what happened in the U.S.? Itís incredible.
People are investing in companies that had no customers, no profits and no business plan,
just weíve got a website and an IPO and people thought theyíre going to get rich on this.
Stop doing that.
Douglas Goldstein: What area could someone consider a safe investment today?
Thomas Woods: Iím just an amateur at this.
Iím nervous about this, but I would say that as crazy as this sounds, itís not necessarily
a silly idea to have some rental properties, particularly if you happen to be able to lock
in low interest rates on the rental properties.
People are going to need housing, thatís one thing you know for a fact, and people
may not feel like buying houses anymore, but this is a kind of income stream that will
come to you and meanwhile, youíll be paying the mortgage in depreciating dollars.
What I think people need to think about in retirement is not, ìHey, Iím going to have
a big retirement portfolio thatís going to yield me zillions of dollars,î because where
is that going to come from?
I mean, youíre going to beat the market?
The days of ìjust throw your money in a mutual fund and it will keep yielding 12%î are over.
What people need to think of instead is how I can generate an income stream for myself
in retirement, whether itís a side business, some properties or a subscription website
where I can share some unique knowledge I have that people will pay for.
Things like that, I think, are the way people need to think.
They need to move out of the traditional thinking of, ìMy pension will take care of me.
Iím listening to Dave Ramsey in the U.S. and he states just mutual funds will solve
my problems.î We have to think more creatively now.
Douglas Goldstein: A lot of people are buying bonds just to get the income stream from that,
which is easier than buying a rental property.
Thomas Woods: Thatís true, but it depends on what the bonds are.
I think in some cases the income stream is pretty low.
If this is what youíre basing your retirement on, I donít know if I want to roll the dice
in my retirement.
Iíd rather take slow and steady.
Douglas Goldstein: Would you prefer to have something not in dollars perhaps, or something
more solid like gold?
Thomas Woods: I do believe in holding some gold and some gold stocks.
Over the past ten years, youíve done pretty well if youíve been in those, but as I say,
Iím just a guy who is a historian and has just observed economies.
Iím not a professional or an expert, but I feel like Iíve got reason to have these
instincts that weíre on the precipice of something.
To watch in Europe how theyíre desperately trying to hold things together doesnít fill
me with confidence, so I want to have a portfolio that says things can be drastic pretty soon,
and I want to have something thatís stable and solid.
Douglas Goldstein: Could you just tell people how they could continue to follow your work.
Thomas Woods: At www.tomwoods.com, youíve got all my blog, my writing, articles, speeches
and stuff.
Also www.learnaustrianeconomics.com is a good resource for people
who want to know what all the cool kids are saying about economics these days.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942, or toll-free from the USA
1-888-327-6179.
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