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7/9 11am Garland, Greece euro, China SM and computer technology.

Jul 9, 2015|

Greece is bankrupt; China’s stock market is dropping like a stone and the Wall Street Journal, United Airlines & NY Stock Exchange computers collapsed for hours. The world’s financial institutions are supported by computer technology. How do we sustain a world system like this? Garland talks to Jim Dorn, Vice President of Monetary Policy at Cato.

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Automatically Generated Transcript (may not be 100% accurate)

One group one of my bid for a it's a money manager and did he really knows his business. Probably for two years now at least two or three times a week. I send them an article agrees. And a label limited to general these sumo prince's corporate Inco is still dying. Because back then announces he uses non news. The dictator. It'll Leo I think it was. Would you select opponent of doing TV news. That at least two or three times we had a very. Show blitzes. In general is still died in the got to a point Saturday and Nightline. Where it was doing skits on. And the same thing with Greece today it seemed like there in that death has been predicted for years but now. Begun reading alone but all of a sudden it looks like you they have to have bankruptcy. And they either gonna go through incredible opening by staying in the EU and more they're gonna go through. Incredible paperwork Colbert rights that would Greeks. Yet Al. The EU. Federer and send bits of what's happening would try and wheels group experts. Per grade gold have Jim Gordon whether it's poised president of monetary policy into institute Jim thank you so much. Sure there are all right that it would start with the greens tell me apart wrong I think the EU's told the leaders of greens hate. Told parliament and everybody. By Sunday we need to play and that we. Don't have to play and expensive no more money Krugman where I'm wrong and tell me what the situation. LA they've been famous for quite awhile and every time they say at the Greeks the side well we better. Just wait a little bit longer fuel we can get out of the rest of Europe and it's it's obvious that these Greek is totally bankrupt they don't have the money to pay that the issue debts are still coming due. The just borrowing to pay off other debt and so they need to have a pro growth economy. And not just austerity and they had been totally refused to change their structure in the economy in terms of really. Highly crossing labor regulations. Unions said just stop trade altogether. And people retire early they get these big that will be relatively large pension their pension burden as the largest in Europe. As percent to GDP. So. That your game victory a chance to have some growth but what they did basically is they borrow very cheap because they were on the Euro at lower interest rates and they. Use of borrowing to finance or pensions and healthcare things like that. And they didn't really privatize their economy lower marginal tax rates to the types of things that you need to have made. Supply side response. Rather than simply. Doling out and ask for more more money to love bail amount so. It it's it's difficult to figure out what exactly the European leaders are gonna do the germs are getting quite upset with your with Kris. That looks like. Merkel will probably work something out so we give a little bit more. Time they they have to restructure their debt rather than just austerity but. Restructuring debt means significant structural reforms in the economy and outside forces don't look like to going to be working to world make agrees to this so as you said. No matter which way great goes people increasing got to face a lot of pain in the future. So if you third going to be grouped required they stay in the used to reach structured debt. Doesn't breach front truly dead mean more austerity. Don't pay yeah. The pension payouts don't they get smaller. In modernization. Of the economy. More of these so called democratic capitalistic. System doesn't that mean more austerity. Yeah there's no question they have to basically. Suffer through this there's no easy way out. And using other people's money is is is very limited. So the Greek people are the suffering substantial decline in the steadily over the next probably decades. To get out of this they really don't have any other choice. A big Greisen is everything a re do not a very large economy. Not that big of effect in crisis may have by every wrong here and knocked a big tuna packed all the national economy and but everything I read says the young pupil bailing out everywhere. Young people in the financial institutes and educational institutes. Leaving going to other countries. Those greens. Run the risk of being basically. A tourism country and the old people. And if so. How to they've restructured debt. Based on people there are generating. An economy. That's very good point to young people who are very well educated many cases they have good skills. Can't find jobs unemployment rate among young people about 50% overall unemployment 28%. That's not a recipe for success. And people will leave that they had better opportunity elsewhere. Greece has to figure out a way to keep those people there that. Frankly the government power right now which is heavily leftist government. Does not provide much. Credibility as far as making the academy of pro growth economy in the long run and even if briefly Z here which is stronger and stronger possibility. Not go back to old currencies the drug. And you know that that. Huge devaluation that will take place is gonna cause a lot of suffering so anymore people might leave on the other hand it might open up investment opportunities. Then allows the economy start growing faster than that ordinarily would. A gym before we get back to question via. Let's go to Lawrence Larry groups he's got a question in your life compete well. Eric Carle with Jim Gordon appreciate. Don't. Call our. Why aren't talking about it at night we never been here talk about it but it. Eight are brought up which saw that apple issue problem judge said. Go at it Arctic national. Oh gaining she wants to be able. It more. Ago. Good question a lot of people asking him. And I would recommend it there's going to be significant. Supply shortages. And the resort areas may not be able to get the the amenities that they want. I would I would basically say if they go back to the drop devalues a lot and they start to get their act together. That would be an ideal time to go because the dollar would be very strong over the air. But right now would be a little bit dubious of going over to visit. That's but to all think they might get all the potential bulk to report that. Thank you are. Larry thank him. Jim you mentioned something like lord took a break. And they've jogged the memory from the thing called Katrina. We we were having money problems in this city. We we constantly said that we were approved we Riordan the we were wonderful and a lot of ways we wore only came crying when he teamed education when he came to a lot of things we were not that good. We totally collapsed. And boom I think and relatively short order. The United States in the world said while. Good property it's cheaper. Educational system that now. Would be open to changes. Financial situations. That were kind of bored they are now open to changes. Wouldn't gracious go to the Brockman knowing that got to go through pain anyway. With the thought. That they booed become. More attractive. In to do when it comes to. The monetary side of the world. Our problem is dead pan. Greek two Greece's always like a lot of European countries. Relied primarily on government rather on the market. But have to GDP is is spent on government type programs. And a lot of people work for the government. So in that sense they've become less responsible and accountable and they wouldn't they were under private system. But I agree that at this point. Some dramatic action has been taken. And there's an opportunity for real change. Sometimes you need. Significant crisis to make you wake up to realize that you have to change things around so. There are people in Greece that I understand. Necessity of a rule of law on private property in private enterprise and free markets. As opposed to left wingers that now run the country. So. If there's. If there is that that does not succeed and they don't renegotiated deal. They move to the drop my. The government will probably Koppel and they're gonna get some more sensible people that are. And that will probably be good in fact it will be at her for Greece's future. It's a beautiful country. The people are very friendly. That's a shame what's going on a lot of people are being armed unnecessarily. Blah lips in a hook a silly opera hypothetical. Let's say everybody agrees she loved the way they've been taken Carol I'm the government. I love the way things were broadened it did it was good light and easier but now. No cash for very little Katyusha of the tea industry it's the banks to virtual. Shopping people. Generally pull what is it six years 600 year rose and day out of one of savings and god. Here Dixon says you have restaurants that can give Peru and you have people who can no longer report their home businesses that campaign there bill it's. They just gonna be forced to change it is there really neat. Doubt in the world that they've gotten totally agree do things otherwise they're going to be starving in the street or leaving the country are. That's exactly right and Merkel is now calling they've called for this before but significantly reforms they've got to reform the labor system it's it's just. It's so it's a route to unemployment for most people. There's no flexibility. Unions control. Just thought everything oh especially public employee unions. And that. There's not such as silly rules but yet people around so. You can bring your food in the market and quoting yourself yeah yes and unions well unloaded it it's. People actually paid and a lot of choice did they hire additional people to a motive because union workers there are so slow it means is just the hundreds of examples that actually the craziness of that system but he can't believe this official statistics because. Agrees runs primarily in the shadow economy. People don't report their income correctly so that aren't there is not much taxes. So their actual GDP is is is is much. Greater that would sanction. Then they're reported GDP and of course they've. They haven't hit a lot of credibility and trust with the reporting mechanisms in the and in the past as well. So yeah at the time effort for a major change and it. People that it had voted were going to vote yes to go along with the the proposal that the European leaders are making help basically bailout. Greece and in exchange for reforms. They're saying well we told you so now it's gonna happen because they say the banks are actually closed. This capital controls people can't. Make it international. Money transfers. A lot of people rich people got their money out of Greece. And if you want to the drop my way they bring the stronger euros her dollars back and they're gonna have a lot of purchasing power of people by businesses and things like that but. The underlying foundations in the climate change and you've got to move from a rule law of from a phase democracy which they have now and limited democracy basically. To a rule of law there's a big difference between limited government and democracy. I believe that limited government comes first and yet protect people property rights and democracy comes second it's important but it has been limited by law. If and if reduces operating on fifty per student funding by having government. Here in Louisiana I think for a 4243%. Of our economy here is federal money. All believe heading in the same direction as Greece. Well if you look at the and it increases overall problem is she. Huge unfunded liabilities further pad pensions systems and medical care. You really do like Social Security Medicare and Medicaid. Exactly. And we have the same problems in the United States to a lesser extent. The unfunded liabilities in Greece or maybe 800% of GDP. Our unfunded liabilities. Amount to about a hundred trillion dollars these days personal security. Medicaid and Medicare. So we're walking down the same path. In terms of basically not having the funds to pay for the promised benefits. So. I think this is a really good example of government failure that the failure to live within our means and to use other people's money into basically. Promised future generations promises are kept he kept. Cells altered to should be a lesson will hear you read Hebrew learning and Jim Warren thank you so much for saying with a longer. Gotta take a break for new whom we come back go more than talk about a couple of headlines. Again yesterday. It's do they have long said. It's China's stock market plunging. A Chinese Government is is and thinking. 32%. Drop in the stock market less than a month. Today's deadline to honor of stocks and big biggest daily gain in six years. Try to figure out not only what's happening but will that affect ops a gym before going to work trying to. The the basic question about greens have forgot. Small nation and small economy in the chance it can affect the world economy you the American economy. While much to that it says the very small economy. And it's certainly not like China which is the world's largest trading nation and the second largest economy in the world creases. But very small. Not really important economy. In the sense of having a big clutch. You know something happens there. There were most of the most of problem will be. Two upset the the European. That Euro zone. If the crease for the draws or that they stay in because life headaches. But the fact of them may be a major factor in future development of the Western Europe for the world as far as I can see. Our idea of starting morning for a turn on my computer talk to group room who's money managers on vacation couldn. How's it going to sit on the old war in knots of wind and this is the guy. The deal and hyperbole seldom get shook conducive to that that China's stock market thing it's. Plunging again and then. Everything were breathing says the government is panic in and we looked at redemption in loops or who's not sure about it. Again that's more in the headlines says China's stocks make the biggest daily gain in six years what's. Well I am it is to. Give me. It again the government intervening. The Garmin has. Basically prohibited. IPOs. They. Put a halt to. People selling shares. People that have big stakes in the market 5% or more. Are prohibited from selling insurance first six months. So. Using. Liquidity injected by the People's Bank of China. Which is used being used basically by a state owned brokerage firms by sheer personal shall provide a margin loans to our customers. So what we see is. He. He has selling side. Is significant limits and also all intriguing. About nearly 50% of the stocks that trade on the two major exchanges. On the buying side we see the government company coming in and in artificially pumping up prices so. The same old thing again and that these are not real capital markets sees her basically socialist markets that. Depended on government and there's no way government property market so forever they. The market went up by. Important doubled year. And the last several weeks they've gone down by about 30% say they went back the Shanghai market went up today as you noted. But. They're just manipulating markets right now in nobody. But nobody they're losing credibility. Each gate by buying these huge interventions that are really forms of capital controls. They also diminish private property rights. And credibility in the markets so it's going to be if you stopped it you know please stop the ability to sell. You're going to interfere with the ability to buys so foreigners are going to be rushed in to those markets anytime soon. And domestic if parties especially the small investors who have driven this market. Are going to be very birdie insecurities that some markets and they've lost a lot of money rate the small investors. They're not going to be coming back in the marketing types of the major problem here is that. The stock market in China's relatively small part of their economy as they rely more on the banking system to finance things. But it sends a signal. That the government is not willing to let markets work they go to basically want to. Control markets and also fumbled markets when they can. But they haven't stopped the old policy. And it's not a rules based regime by any by any means and so does is gonna put reform back. And that's a real problem because if they don't open up and liberalize their got a slowdown or growth even more. And was slower growth that armed the global economy unlike Greece China is very important player here. So it just has some significant over the repercussions down the road China slows more. He bringing even if it's of small market. With a only can mold percentage of their population invested so can affect the world market. Well yes but it's not so much the market itself but at the slowing down reform and repercussion is gonna have. Their credibility because they're trying to get foreign investors actually come and they they. They they opened up their markets. A little while ago with the Shanghai. Hong Kong connect they connected the two markets. And they're gonna allow greater foreign investment but foreigners that have been very cavity. About by mainland stocks because of lack of transparency and so forth so when you really put the capital controls but you also. Basically. You know put prohibitions on the buying. On the best selling stocks you're going to limit. The interest in buying shares advocate self immediately on the markets. We couldn't hold the compensation I guarantee when that opponent of Jim lobe where we're talking brief we're talking and trying to. China seems to be the the biggest threat the most important issue. Yesterday we're hearing that. The stock market dropped 32%. Move from month. Chinese Government was so really concerned today. Big John back up in the stock market. But I've I've read from headphones they say sure breached I'll. 40% stocks and trading forbid institutions. From selling. Pour millions of dollar billion into the market of course you're gonna Croat and on the way up. But at the same time again reading from they had phones this morning. To have been made these these statement. One certain there's some resemblance to the United States in 2007. Chinese stock market is not as big but and it. Could spread through the economy as a whole. When said the might be a parallel with 1921. I mean 1920s and line. Trying to like America and nine years ago rapidly urbanized and big growing middle class whose. And Americans like Chinese discovered Morgan margin trading. In the in the bubble popped in the Great Depression. Or those two. Statements. Exaggerated. Is there any chance. A 2007. Meld their owner in the 1920s now and depression. Well past. There's definitely a bubble and Schneider's at the acted well in China and that bubbles then created. By the government just like the bubble in the US markets in the bond market the stock market you know as. The Bernanke put in the eighties beyond put in in the sense that. The Fed seems to intervene every time that the markets. Starts to go down a little bit deflated it. If the market expected that you can increase interest rates start to go down so. They backtrack and say oh we have to wait a while China has been doing. In the same thing it's been following the Fed's policies that except China's got a super put because they're. Financial system is centrally planned from atop the bottom. US system is it is much freer. So the main main problem in China is. Of this stop go monetary policy. The policy of government to support Marcus stock prices. Not necessarily at all cost but looks like they're doing that now. And also the government in China it was a one where is responsible for reelection margin landing days they relax margin minding and then make tightened up. And the market started to go down. As soon as it did it relaxed marginal lending again by changing the collateral rules. And most Levine is I'm leveraged the margin of buying in China has increased as some like 45 fold over the last year. Which is unprecedented. And they're eating using more leverage now because the funds that the bank of China as the People's Bank of China the Central Bank is. A providing the liquidity. For the market stabilization funds is going to stayed on brokerages. In the brokerages are using those funds to. To leverage up in and buy shares. So it's totally an artificial market in. Things have to be sorted out eventually they wanna have any kind of semblance. Of the Indy global financial power. So the real threat is. I'm Chris again on credibility. Lack of trust in the government and that that that's probably a good thing we should not the trust for the government but. Government has to have rules to run by. And China both China and the United States in terms of their central banks China's Central Bank. Is totally not independent because it's run by the State Council basically by politicians. The Federal Reserve Bank unit has some independents but it's overstated. It's it's heavily politicized as well by. Providing cheap money to finance US deficits. And by analyzing sabres by having these interest rates held. Near zero for more than six years now it didn't hurt his wrist taking. And it penalizes conservative investors. So we have our own balls to worry about how the third is that so. Chatters in kind of a mirror images of what can happen in the United States at some point when interest rates actually do start to increase. Although again we have much freer markets in China. Armed if there is a pinnacle there even though it's on the small market. Could agree to panic here. Well it is a senate China's growth slows further extended. Effective US economic growth as well global growth. And if the Fed at the same time decides to start increasing rates. Which you will have to do so. Can't hold rates there's girls forever. Then there's going to be we've urgent and massive prices in the stock market is gonna put down low with bond prices. But. That. The markets are really unsustainable. There's a disconnect between the markets in the real economy. The US stock markets increase significantly over the the last five years or so but the economy's still very sluggish. In China as a market more than doubled in any year but there economy is actually slowing. So market should be based. Reality not just the government policies and expectations of low interest rates engineered by the Fed. Jim I here I got about a minute this may be your question do that you can't respond who brought. Since you're head of monetary policy element here via an opinion. You know I ended yesterday computer went down problem with the boy computers speak to each other. New York stock to cheering virtual who's saying time and computers garuda and internal technical issue. Wall Street Journal their computers go down the servers. Were responding quickly enough. To their pull up Wall Street Journal. Wall Street's concerning considering. Robards. On Wall Street to replace analyst reports who would automated robots. Our financial system seems to be. On the AA computer wire for a technical wire. Is suited to something we're barely balancing on or. We're gonna get better handle on that as and stop having so many of via support mechanism to collapse. Not an expert but I understand it they were upgrading the security protection for us at New York Stock Exchange. And sometimes when they do that neighboring news software and so forth to present southern glitches. But it wasn't. Tremendous shock because. The market was down for so long although trades to place another. Markets so they had sort of a backstop there. But we live in an ages. You know information and processing and it has to be extremely. Sophisticated so you're gonna get some glitches once in awhile. But it wasn't as cyber attack or anything like that so. I have enough confidence and you know in our expertise that I think that. That's not it is a major problem major problem is our policy. Lines policy. Jim Norton fifty minute come decision could not a bad about you thank you so much for the time and the expertise. Throughout. Are we're gonna do love a short gear and on immigration. And our southern border. And and the reason for business unit. A couple of reasons these from my pockets. Every zone and something goes wrong would be illegal immigrants here that think. All Hispanics. Often Tom good. Hard with the same broad. So and more talk we're gonna talk to an immigration and turn Bruton talked to. Order our congress people trolls who stone. And what I asked him what the ideas or in the closing boarded his weak. During politicians saying we're gonna close. The border. And one of the things a more fully understand. Is why don't the border states used in national gore. Toward the benefit. That Hispanics. Already in the country for the better read of the week immigration goes. Who's supposed to ago. And four of the benefit of those that they closed the border come on decks that well there's number called two's are general 187.