Loading summary
Transcript1 lines
- [00:03]
A
This is the Human Action Podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy, everybody. Welcome back to the Human Action Podcast. Today I am going solo and I'm going to go through three scenarios where expectations of massive changes in the availability of a product or good in the future can have big implications for its price and rate of production today, depending on the scenario. Okay, so that's the basic framework here. Specifically, I'm going to walk through what would happen if people become certain that down the road there's going to be a massive influx of new US Dollars. And then I'm also going to say, what if they become certain that down the road there's going to be a massive influx of new oil? And then finally, we'll cover gold, right? Because it will see, the underlying principles are basically the same, but the way it would manifest itself, I think is different. In those three examples, I think we'll show you some of the nuances involved where this came from. On a different podcast discussion I had with Adam Haymon, somehow we got discussing, well, hey, you know, what if Elon, his extraterrestrial activities take off, and what if they start mining asteroids that are full of gold and bringing them to Earth? And what happens when people become convinced that the arrival of a bunch of new gold is imminent, but technically it hasn't gotten here yet? And what happens? Right, so that was the kind of stuff that we. And I realized, oh, yeah, this is interesting. And it, there are some nuances, and it depends, like I said, I, I think the analysis of gold, as you will see in a minute here, is different from US Currency and oil. And so we'll, we'll walk through that. And then if you're saying, but what does this have to do with Austrian economics? Well, for one thing, as we'll see, the analysis relies a lot on subjective expectations. And so that's very relevant to an Austrian crowd. But beyond that, back when I was arguing Austrian business cycle theory with guys like Tyler Cowen, I was going through scenarios like this. I got bogged down. I was a busy guy and didn't fully pursue this, but I have often thought a fanciful way to kind of motivate people and get them thinking to open their minds to the kind of thing that Austrians say happens in a boom bust cycle. The kind of thought experiments I'm going to walk you through here in a minute are good practice to warm you up to understand a more realistic scenario where just to cut to the Chase during an unsustainable boom, there's a sense in which people think they're wealthier than they really are, and so they consume capital. All right, and so just keep that in the back of your mind. At the end of this discussion, when I go through those three examples, I'll wrap up with what's the relevance to standard Austrian business cycle theory? Okay, so that's the plan. Let's dive right in. All right, so imagine that we're in initial equilibrium. We're talking about American citizens who use the US Dollar as their main type of money. It's a poorer money, but it satisfies the definition that it's a commonly accepted medium of exchange among this community and the federally served. Maybe because the new guy coming in, he makes this very credible announcement, people are sure he's not bluffing. And he says, in one year's time, we're going to have an actual helicopter drop. In deference to my colleague Ben Bernanke, we're going to have a bunch of helicopters load up with hundred dollar bills, and they're just going to go around the country dropping those things off. You know, we'll tell people ahead of time so they'll know where the location, they'll know where to stand and get ready. And, you know, it's not like these things are going to go in the ocean or something and no one's going to know where they are. Nope, these are all going to get in the hands of the buying public and we're going to print up $5 trillion of new currency in exactly one year's time and distribute it. So the question is, what would that do right now? All right, and the reason I like going through examples like this is I think even among, well, arguably especially among hard money types, you know, people who love the gold standard, or maybe they like Bitcoin, because, you know, once it gets capped at 21 million, that's it. In contrast to yucky government unbacked fiat currency that I think sometimes they get into a trap where they think that the purchasing power of money is mechanically pinned down just by aggregate numbers. And what helps to reinforce that erroneous attitude, I think, is what's called the equation of exchange. If you've seen that, where it's MV equals PQ is the way most people write it nowadays. They used to do it P times T, but we'll leave that aside. All right, so the MV equals pq, it's called the equation of exchange. It stands for the left side, the M times the V. Is like the total amount spent because M stands for the stock of money and V stands for velocity. Meaning like on average, for the given time period that you know, you're analyzing, how many times does a unit of money change hands? Okay, so N times V then would be the total amount of money spent during the time period that you're analyzing. And then the right hand side of the equation, P times Q. This is again a more recent formulation. The P stands for the average price level technically of real output, you know, goods and services that are included in real output. And the Q stands for the aggregate amount of real output or how much total stuff is produced. There's a little tangent here. You might say, what do you mean real output? Because usually with the MB equals pq, people don't have in mind stuff like corporate stocks. Okay. Whereas technically, when you just look at, on the left hand side, you know, how much money is spent, well, people spend money buying corporate stocks. So actually, strictly speaking, the velocity there, that should take that into account too, that it's the velocity of turnover in transactions involving real goods and services. If that's what you're trying to do. Okay, I'm getting a little bit in the weeds here, but I'm trying to cater both to the general person as well as the, the expert. Okay, but take a step back. You get the idea where that's coming from. Yeah, you got to be careful about what subset of the economy are we talking about? But you get the idea that the total amount spent on the left side is equal to the total amount received by sellers on the right side. That's got to be true. It's not a theory, it's a tautology once you define the terms. Okay, and then with that framework, people can say stuff like, oh, if you doubled them but kept velocity the same, then what's going to happen? Well, you could imagine prices doubling if output stays the same. Right? So there's no stimulus to production. It's just the increase in the money stock is fully absorbed by an increase in the price level. Or if you're maybe a Keynesian and you think that you initially started out in a liquidity trap and that there was underutilized capacity in the economy, unemployment was 12% or whatever, and then the government printed up a bunch of money and spent it into the economy. In that kind of a scenario, you could say, oh, M could double, but Q could double too. Or maybe a mix of the two more realistically, that M doubles and, you know, P goes up 20% and Q goes up 80% rounding off. Because with the multiplications, it doesn't quite work out like that. Okay? So that's the kind of way that that's used. And there's, strictly speaking, if you're okay with the definitions involved and you don't mind aggregating and talking about holistic things like what's the velocity of turnover of a unit of money, which, you know, isn't talking about subjective preferences, right. Then, okay. But the problem is, even there, I think it leads people to view the relationship between money and prices very mechanically. And that's, that's not correct. That's why I like doing examples like the one I'm doing right now where you say, suppose we're not putting any new money in right now, but people come to believe that in the future an influx of a massive amount of new money is coming in, and then what does that do right now? And so we'll see. That's going to cause prices to go up right now before the money's hit. And so the MV equals pq. The way you would handle that is you would say, oh, V increased, right? So even though M hasn't increased yet, how can you get P to go up? Well, if V goes up, right, that's what's going to happen right now. Money's going to, on average, change hands more time per time period than before. All right, so that's. So again, the equation of exchange, once you accept the terms, it's not even a theory, it's just an accounting tautology. So it has to be true, even if it's misleading, and that's the way you would handle it. But again, in practice, a lot of people, I don't think fully take that into account when they're deploying that thing. Okay, so now that I've explained to you why I think these types of thought experiments are useful to shield you from misunderstanding or having faulty logic. Let's just go through it. So right now, people are sitting on their cash balances, right? You. You people are in a rough equilibrium. And this. Yeah, people want more money, right? If you ask people, hey, could you. If there are more money available to you, would you want it? And they'd say, yes, obviously, unless you're like a monk or something. But the point is, at any given time in equilibrium, people have the optimal amount of cash balances, okay, Given the constraints. Right. That, that's to say, would you want more money just as a gift is not the same thing as saying, given your scenario right now, in the ways in which you can Obtain money, more actual cash, or you know, balance it with your checking, you know, with your bank and your checking account. Do you want to do that? And they say no, right? Like, oh, I have my corporate stocks, I have my real estate properties, I got this, I got that. I have my normal income from my job and I've deployed it to various things. And on the margin that, no, I like my current composition of my assets and that to bulk up and have more cash in the sense of actual currency in my wallet or checking account balance, I would have to pull that from somewhere else. And I don't wanna do that. Okay, so in that now original equilibrium where everyone's holding their desired amount of cash balances, the news breaks that, oh, in a year the Fed is gonna do a helicopter drop of trillions of new dollars, a hundred dollar bills. What happens? And so obviously. People looking ahead are going to think the purchasing power of money is going to drop when, when those hundred dollar bills drop. Right? Meaning the prices of goods and services looking around in our economy are going to be much higher, say 13 months from now than they are right now. And so what would people do now armed with this information is they would adjust their current financial portfolio and you know, the other elements of their wealth, because that's a big change. All right? And so in particular, people would do stuff that, you know, they would, they would try to get out of dollar denominated wealth and get into things that are, quote, real, that are not pinned down in terms of US dollars. Okay? So the obvious thing is like just actual cash, you know, so people who in general have like some guy who's got $5,000 in his checking account, you know, maybe he has technically 3,000 in like a savings account with his bank in 2000 in checking. But you know, now those things are like basically interchangeable legally and even in terms of economic theory, just with the technical treatment of those things. So he's got like 5,000 in the bank and he's got, whatever, maybe he's got a thousand dollars. You get 300 in his wallet and 700 in a home safe, like an actual currency. Okay? So that person is going to think that's I'm holding way too much cash, given what I know is coming. And so he would go to the bank and withdraw his cash or you know, write a check or something to buy something he would want to get out of that. Now, depending on his views of the world, who knows what he's going to get into? Maybe he would bulk up on gold coins, maybe he would go put it into corporate stock, who knows what. All right? But he certainly is not going to keep it in physical cash or even bank account balance. And he's also not going to go buy U.S. treasury bonds, at least ones that aren't, you know, inflation indexed. Because that also, if you have a claim that says, oh, in the future, someone's going to pay you a certain number of US Dollars, the price people would pay for that before the news broke is way too high. Once the news breaks, okay? Because the dollars that you're buying with are stronger than what you're going to get paid back with. Okay. At least, you know, until the adjustment happens. Okay, so what does that mean? Once that news breaks and everyone comes to believe it, people are trying to get rid of their dollars and they're also trying to dump their bonds, their dollar denominated bonds. And so what's going to happen? Well, and here's the interesting thing with this stuff. You might be tempted to say, oh, yeah, no one wants to hold dollars or bonds anymore. They dump them. Right. But to, if you sell a bond, what does that mean? That means somebody must be buying it, right? You can't, it can't. When you say dump dollars, they don't literally mean people are going to go and throw them in the gutter or the garbage can. Depending on the announcement that could happen. I, I should probably mention that, but I threw out some big numbers in the beginning. If they said we're going to drop $60 quadrillion dollars in $100 bill form next year, then, yeah, the dollar might just collapse and people would stop using it. So that might be the outcome. But suppose the number's big enough to shock everybody, that this is crazy, but yet not so big that it literally causes Americans to switch over and stop using dollars. Okay? So the number's got to be in that range. So I'm saying, given that to say people dump dollars doesn't literally mean they throw them out. It means they're trying to spend the dollars to get something else. And some people, depending on their financial sophistication or whatever or the panic, you know, if they don't have a brokerage account set up and they don't know how to order gold coins, or they might just go to the grocery store and buy, you know, a bunch of canned food and toilet paper and, you know, stuff that they think, yeah, I can use this stuff, it's not going to go bad. It's not like I'm going to have no need for toilet paper. And Paper towels over the next five years. Yeah, I'll just bulk up with that stuff. And you know, they'd probably try to find stuffing stuff that was more valuable per unit volume. Right. Because depending on how much money they had to get rid of, you wouldn't want to spend $5,000 on paper towels that you had to take up a lot of space in your place to store that. Okay. But I'm just saying that's the kind of thing people, to kind of mental processes people would go through when that news breaks. Okay. And so given that the sellers, what are they going to do? Well, yeah, they, they don't want to sell at the original prices either. But again, if we're assuming that the dollar is still going to remain the money of Americans, people still want to receive dollars, but they're just going to compensate and adjust for this new information. So the point is the grocery stores and whatever are going to raise the sticker prices on paper towels and tuna fish and so on. Okay. And likewise, Going the other way that people trying to sell. It's, it's interesting. People trying to sell corporate bonds, Inc. And Treasuries and whatever, government bonds, if they're trying to get money for it, there's like an intermediate step there. Right. So that's why the analysis of those is a little bit trickier. I won't go down that path right now. But just keep in mind there is something a little funky there that once prices fully adjust in the, you know, today, then the bonds, like you're back just to the time preference ratio. Right. Because now today's dollars have been weakened once people respond to the news. And in that case you're just once again trading dollars today for dollars down the road. And it's the time element that's relevant. Okay. But again, in the initial reaction, there's a lot of complicated stuff going on when it comes to people holding dollar denominated assets and they want to get out of it. That if you're assuming they sell it first for money and then use the money to go buy something else like real estate or gold or corporate stock, that, that little, that first element is, is tricky to, to walk through. Okay. Because the, the bonds are also dubious, but so is the cash that you're selling them for. Okay. Okay. So I think I've shown you that yes, even though the new money hasn't hit yet, prices today can start rising rapidly if everybody's expectations change. So that's, you know, one main goal I wanted to accomplish was just to convince you of that. So you realize that the way like the Fed can debase the dollar isn't merely by dumping more dollars in the economy. Just convincing people that they're going to can also make the dollar crash in terms of its purchasing power. Okay. Probably obvious to people just to say it. In case you've never heard this statement, the purchasing power of money in value works that if the purchasing power is lower than prices quoted in that money are higher. Right? So if gasoline goes up to $10 a gallon and going and seeing a movie costs $40 and so on, the money is weaker. So money has lower purchasing power and prices are higher. Right. That's the way that stuff works. Okay, so we see the naive quantity theory of money there isn't literally true in the sense of saying, oh, if you want prices to rise, you got to have a corresponding contribution in terms of the money stock. Or it's not even like, oh, if there's an earthquake and output gets cut in half and the money stays the same, well then prices double. Right. Some people might argue like that and think, yeah, you could have a real supply side shock on the output of goods and services, but if you hold the money constant, then there should be a correspondence and no, again, in general, there's no mechanical relationship that the price per the purchasing power of money is something that ultimately derived from subjective preferences. Right. Just like the market value of anything is ultimately traced back to subjective preferences. It's not some objective cost theory or labor theory of market price. No, it's the modern subjective revolution that Carl Menger and two other guys ushered in to modern economics. Right. And so that's the same is true of money, that expectations play a role in its current purchasing power. Okay, incidentally, let's do one more comment on this case and then we'll move on to oil. What's interesting is you might say, okay, but is it just a wash then? Like, does everything just adjust? And then when the, when the helicopters drop the money like the new currency, that has no impact because everyone's adjusted. And no, it's more nuanced than that. So. What ends up happening? I'll just, I'll just say it would not dwell on it. And the, the overachievers in the audience, if you want to think it through on your own and see if you can come up and match my analysis. Good for you. What you're trying to do is you want to get rid of the cash until the point at which you might have thought originally, prices have risen so that now there's no more fall in prices expected. Right, because that's the idea that originally when you're holding, it's like a hot potato and you're saying, oh geez, right now with the current structure, you know, the web of market prices out there, this money has decent purchasing power. I know in 13 months time it will not. So I want to get rid of it. While right now it's kind of overvalued. Like in other words, it's going to depreciate rapidly and I want to get rid of it before that happens. But then in the very act of people trying to get rid of it, that pulls the depreciation forward. It makes, you know, prices rise in the present. But. And so when would that stop? Well, clearly if prices today rose the full amount. And so that, yeah, if you knew in 18 months time gas was going to be $30 a gallon, once gas gets to be $30 a gallon today, then you say, okay, there's no reason now for people to want to get rid of the money because it's been fully. But then that's weird because then you say, well then, but surely whatever the situation is, surely once the new trillion dollars or whatever it is gets dumped in, wouldn't that push prices up more at that point? Like how could it not? And so I, I think what ends up happening is people, when they're making decisions about how much cash do I want to hold that. There's a, there's two different reasons for holding it. One is just as a component of your financial wealth, just like you would hold stocks and bonds and real estate and whatever, precious metals, and you have a little bit of cash just for that function. But also if it is the money, then you know, I have things I need to buy over time. And so you have to have some just for that purpose alone. Like it's, in other words, it's not a speculative move you're not holding onto. It is an asset that might appreciate in value. You're holding it because it's like a, a redemption ticket that allows you to go out and get food and continue to get your shelter services if you're paying rent to a landlord and stuff like that. Right. So that's an obvious reason partly why people hold a certain amount of cash balances. And so you put all that stuff together. I'll just, like I said, I'll say it and then move on is I think what ends up happening, like to understand, like how can we obtain equilibrium even though everyone knows there's this massive dump of currency coming in in 12 months. I think what happens is people drastically reduce the proportion of cash in their overall portfolio down to like the bare minimum where it's just satisfying the transaction purposes and how much cash you need to hold, like to pay to buy food next week and things like that. That depends on prices, right? So there's that element involved as well. And. And so it ends up being a much smaller portion of your overall portfolio in real terms. While you know that, oh, there's going to still be this massive depreciation that's going to hit, because even as prices rise, if they haven't fully risen, then, you know, to reflect what's going to be in the case in a year, then people might be trying to divest themselves of the cash because there's that negative, you know, that, that depreciation element. And so then. And they're only holding stuff because, yeah, I know it's a bad investment speculatively holding this money that's losing purchasing power over time. But I need to keep it because again, I got to go to the store tomorrow and buy tuna fish and stuff for the family, right? So that's why I'm not literally getting rid of all my cash today, because tomorrow I have to go to the grocery store. And we're not yet in the state of pure barter, whereas if we were, and that happens in some economies, that there's the hyperinflation so bad the currency is literally abandoned, and people either do barter or they use money from some foreign country, okay? So I think that's what would persist. And then when the new cash gets injected, people expand their cash balances, prices rise even more, and then you're in a new equilibrium where now the impending price hikes have fully been consummated. And so now the money's not losing more purchasing power, day after day, things have leveled off. And so now people just hold the desired amount of cash balances in line with what they did before in terms of, like, what share of my overall portfolio. And when we say cash balances, we mean real cash balances. Like, if people will say, oh, I want to have enough in my wallet that I could go out to eat and fill up my car with gas and do this and that. That's kind of how much I want in my wallet at any given time. Well, that's going to be a much bigger number of dollars in the new equilibrium once all the new money hits. Okay, but you're not. Once the prices have fully risen to reflect the money drop, the helicopter drop there's not a further disincentive to holding cash at that point. Right now, people, it's not a hotel, they're not trying to get rid of it because they know, oh, it's going to drop in value rapidly. They, they think, no, now we've settled into a new equilibrium. Okay, so anyway, that's kind of the way I would reconcile all that stuff that before the drop hits, like two days before the helicopter drop, there are people holding cash that know, oh, there still is. Prices still need to rise more than they have. Even though things are a lot more expensive at that point than they had been, whatever six months earlier. But still people are holding on to it because it's small amounts. It's like the bare minimum. Like people are really being, you know, sweeping their accounts, they're looking under the couch for, you know, change or like to get rid of it if they can. But still every unit of money is owned by somebody. One minute before everyone sees the helicopters and they're getting ready to drop the hundred dollar bills, all the money that previously had been issued is still owned by somebody. And so I'm just trying to show you how that, that works. And again, the reason is that there were, you know, transactions that people had. Like right at that last moment, like someone's going and say, I, I need to buy a can of tuna fish two minutes before that helicopter drop happens. Or I, or maybe not tuna fish, even like a hot bowl of soup that I have to eat right then because it's hot, nice and hot and it gives the merchant and like at that point that merchant now is going to charge the full amount for the bowl of soup or something. And then, you know, so you get like a knife edge result there. All right, folks, we here at the Mises Institute wanted to remind you that Throughout May of 2026, we are celebrating the year of Rothbard by giving away a free copy of the Anatomy of the State. So if you go ahead and go to the link by May 31st, you can get your free copy go to mises.org ha pod free. That's mises.org h a p o D F R E E To get your free copy of Murray Rothbard's Anatomy of the State in celebration of his 100th birthday. All right, I won't take as long on these other ones, folks. Oil. So let's say here, what if there's some new discovery and you know, maybe it's another one off the coast of Venezuela and people are like, oh, look at this, there's now 600 billion barrels of oil, this new string of deposits that we've located. But the difference is here, oh, once we, you know, we got to put up a deep sea platform where. But once we get that built, it's going to be really easy to pump the oil. Like, we're going to be able to get it at $20 a barrel, you know, once we get the infrastructure all up running. But it's going to take us five years to get that platform built and all the stuff ready to go and the, you know, drilling done. But once we have that up and running, it's going to be like, easily we can just pull barrels of oil up at $20 each and we have just boatloads of it. All right, so what would that do? I want to say it would make people right now who are sitting on oil, it would make them want to extract it faster. Right. And so especially over time, as people with existing, you know, known deposits and things, and they had had a timeline of development, knowing that, oh, wait a minute, in five years, the global price of oil is going to drop to $20 a barrel because this new source is coming online, or let's say $30 a barrel, because if they want to get, you know, their margin or something, then people right now sitting on oil that's selling it 100 or whatever, they're going to want to get rid of it now. And to the extent that when we say, oh, we have it right now, we mean, well, it's, it's in a well, you know, it's in this deposit. We know it's there. Our surveyors have located it and whatever, but we still got to build out the wells to go get the thing and whatever that. Okay, well, they're going to accelerate those plans. Okay. And so the knowledge of that future influx of extra crude that two weeks ago nobody even knew existed, just that knowledge will over time allow for the price of oil in the near term to be lower than it otherwise would be. All right, so it's this interesting thing where there's a sense in which the future availability of cheap oil makes oil cheaper and more available in the present, even though that might seem impossible. Well, there's not a time machine. You might think, oh, yeah, once those new, you know, once that new crude from Venezuela is available in five years, oil will be really cheap and, you know, people can buy bigger cars and whatever goods and services will be cheaper to the extent that they depend on fuel to move stuff around and whatever. But you might think that's not going to help us in the here and now. And again, that, that's in general, that's wrong to think that way. And this, this came up. I was doing a lot of work for a free market energy think tank in the 2000s and the George W. Bush administration was liberalizing policies like letting oil companies explore offshore and stuff. They weren't even authorizing drilling. They were just letting them go look for the stuff to get an idea of what's out there. And that was like a big thing freaking out environmentalists. And when Bush made the announcement, I forget what was, what the context was, but like in the markets, the, the futures price of crude dropped right away. And some people were, you know, lambasting that and saying, come on, that can't. Those two have nothing to do with each other. Just because he's giving a green light to possibly more production down the road, how could that possibly make oil cheaper today? And again, I was walking through the kind of stuff I just did with you folks here. All right, so I'll link to. In the show notes page, I have an article on oil pricing and it's, there's this great paper by Harold Hoteling, I think from the 1930s. I think it's called the Economics of Exhaustible Resources. So especially if you're a professional economist and you haven't read that paper, you should go check it out. Start with my link that I did an Econ Lib piece on it to get just an intro to it and then go see if you want to read the paper. But the, the long and short of it is just to give the, the insight. Suppose you had, suppose the oil in the world was just collected in giant swimming pools, like you know, the Olympic size swimming pools, right? So it's not that it was buried in the ground and you had to spend a lot of resources to go get it. Imagine it's owned by different people around the world. You know, a thousand different people have all the oil distributed equally among themselves, but it's in the. Again, these giant pools are just sitting there. And so when you wanted to sell a barrel of oil today, all you got to do is take a literal barrel and just dip it in and fill it up and put the cap on and then go sell it, right? So the extraction process is quite simple. And so if that is how oil were owned right now, you might say what would determine the market price and how would the rate of extraction get pinned down? If, you know, if it's all laissez faire, everybody's private Property and believes that their property rights in that and their own oil deposits secure. What would happen? And hoteling goes through arguments. I'll just be real brief here that the rate of extraction depends on the market interest rate. And so in equilibrium, it has to be that you're on the margin indifferent between selling one more barrel of oil in the market today for the spot price versus keeping it in your pool, let's say, for a year, and then selling that barrel next year at whatever the spot price is a year from now. And so when you look at the difference in those two, the interest rate matters because let's say you can sell for a hundred today. You could take, you know, you sell the barrel for a hundred dollars today and then you can go put it into a bond that yields 5%, let's say if, if the, you know, interest rate's 5%. And so that means your hundred dollars a day can turn into $105 next year if you sell the barrel today. So if you're going to refrain from doing that, if instead you're going to keep the oil in your pool and not sell that marginal barrel and carry it forward a year and then, you know, dip your barrel and extract it and sell it at that point for the then spot price, that's gotta be $105, right? Otherwise, you know, if it were lower than that, well, then you should have extracted more originally, right? Cause you'd make more selling today and then rolling it into bonds and getting the interest. Okay? On the other hand, if it were a lot higher, right? If you, if you expected the spot price to be 120 in a year's time, then you're selling too much oil today, rather than selling it today, you should keep it, you know, on the margin. The last barrel you sold for a hundred dollars, you should not have sold that. And you should just carry that forward a year and sell it for 120 because you make more that way. Okay? So with logic like that, what ends up getting pinned down in the equilibrium path is that people around the world are extracting from their, you know, giant Olympic pool stockpiles of oil at a rate such that as they draw down the oil that over time the spot price rises consistently with what the interest rate is, so that all along the way people are happy with that path, that they, you know, little deviations to extract more or less don't earn them more income. And then over time, you know, the oil shrinks and the spot price rises over time, which makes sense as the world's running out of oil on the margin, the spot price rises and people adjust accordingly. Right? That when oil is relatively cheap in the beginning, people use it for all kinds of stuff. And then over time, as it becomes more and more scarce and the market price rises, people economize more on it and you know, industry and whatever drivers use less and less oil over time. And that's exactly what you'd want, the interest rates doing its job. If people are more patient, the interest rate is lower. And so that means, if you think about it, that people would extract it at a slower rate. Right? Because then you just need the spot price to rise less and it makes more sense to defer it to the future. And that totally makes sense. If people are more patient and interest rates are lower, then they're like, in a sense, investing the oil in longer processes. Right? They're letting it go get carried more into the future, which makes sense. Okay. Whereas if people are very impatient and interest rates are really high, then people are going to extract the oil more today to get the spot price and then let it roll over for a year at the high interest rate. So in that equilibrium, oil is extracted at a faster pace so that the spot price rises more rapidly year by year, which again totally makes sense. A more impatient public is going to consume the oil faster. It's not that one's right and one's wrong. It's saying that that's the sense in which market prices help guide the owners of oil deposits to do quote the right thing in terms of what the consumers want. Okay, I thought I was going to spend a minute on that and walk through that. There you go. That's, that's how that Inherald hoteling spell all that out in like a math model, I think in the 30s. But you can see it's very consistent with general Austrian principles. Okay, so in that framework, then you got your original equilibrium. People make expectations about the future. We're going to extract oil and okay, and it's going to rise. And then all of a sudden there's new information dumped in your lab saying, oh, five years from now, either because aliens are going to show up and give US oil at $10 a barrel or whatever, the market price is going to fall off a cliff. And so now with that new information, when everyone recalibrates their plans and they extract oil at a much faster rate and what's going to end up happening is if it, if it's the case that when, you know, the foreign supply, like the, the asteroids or whatever show up or the aliens show up, or some massive new deposit that dwarfs everything we've ever heard of is discovered. If that's going to be so much that that alone could just supply humanity from that point going forward, then what happens in the equilibrium is all the known stockpiles of oil get drained down such that that last drop gets used up the second before that new supply comes online. Right. So, you know, if we know the aliens are going to show up, you know, they communicate with us and we're sure that they're truthful, and they say in, in five years we're going to give humanity as much oil as you possibly want at $10 a barrel, then the incentive of all the existing oil owners on Earth would be to rapidly use up and sell their product. So long as the market price is higher than $10. Right. So, and you again, they could do that, just use that last drop going into it. What could also happen too is there's no reason that the current price would have to drop to 10. That's, that's why I'm pointing out that it could be that. Yep, given all the oil we have in a five year window, if we produce and sell at $22 a barrel, Humane is going to use oil much more rapidly than it is when it's $100 a barrel. That makes sense. Right. And that it just, the last drop gets used up right before the new supply comes on. So that could explain like how can it be that oil sells higher than $10 a barrel if everyone knows the $10 a barrel oil is coming? It's because again, you can't get it right now. All right. And if the numbers are such that we're going to use up all the oil, you could have that discontinuity that doesn't violate arbitrage. Right. Because again, that last bit of oil gets used up and you know, the seller gets his $22 right before the price drops to 10. But nobody suffered a capital loss because no one was holding oil the moment that the price dropped from 22 to 10. That's what I'm trying to get at. Okay, finally, what about gold? Again, the scenario got our current equilibrium. There's gold miners and things like that. And then someone grabs. We got a bunch of asteroids now that have been redirected somehow and they're coming towards Earth and we're going to be able to mine them or we send stuff out to mine them and bring it back, whatever. And we realized people come. Oh yeah, in five years, just thousands and thousands and Thousands of tons of gold are going to just start arriving at Earth. And, you know, the extraction cost is going to be very, you know, the harvesting cost is going to be pretty minimal. What happens. And so this is kind of like a combination of the two things, which I realized when I was having that conversation with Adam, that people are going to, you know, mine more gold in the near term. There's no reason to. To space it out. And the price of gold is going to drop, and people, for industrial purposes are going to use more gold in the present. Just like when people are cranking out the oil extraction and the price drops to 30, and then 25 and 22, people are going to consume a lot more jet fuel and gasoline and so on, because now oil is cheap, but here there's a mixture of things that it can drop even more because it's also. Gold is like US Dollars. And like oil that it's used for industrial purposes. So there's that element, but it's also being held by a lot of people just as a, you know, an asset that has market value. It's a way of carrying market value into the future. And so that the. The knowledge that gold is going to drop in price five years from now has a lot more implications on the current price of gold than it might for some other mere commodity. That's what I'm getting at. Okay. And so, again, like, you can kind of do gold as a combination of the analysis for the dollars in oil. And one way of thinking about it is because you. You're thinking of the logic. Oh, oh, yeah. Because what happened with Adam was at first I was thinking, well, no, I mean, there's only so much you can do, just like with the oil I was showing, even if we're sure oil is going to drop to be $10 a gallon or a barrel once the aliens start delivering it to us. But before then, that doesn't mean that the crude price has to drop to 10. It's going to drop, but there are physical constraints that if there's only so much oil to go around in the present, and, you know, more realistically with the oil in the ground and stuff like that, you got to pump it like the price is not going to drop below the cost of extraction. Right. Because then they'd be losing money on that deal. Right. So there. There are limits on how low the price of oil can go just physically. And so at first, that's what I was thinking with Adam. Well, no, even if we know that gold's going to be $10 an ounce. Once these asteroids start showing up, that doesn't mean it would necessarily drop to that right now, because it costs more than $10 an ounce, you know, to mine new gold. And so even if they increase their extraction rate, there's that physical constraint. But I realized. And his point was, yeah, but what about expectations? And, you know, he was kind of thinking of it in terms of money. And I realized, right, and so the way to reconcile all that is the where new gold is coming from today is not just mines or where it could come from, but also there's lots of people around the world who are sitting on gold for speculative purpose or hedging purposes, financial reasons, right? Not because they have a tooth filling that they need to get in there, or they have arthritis and they get gold injections that, no, they're holding on to. Gold is a way of carrying purchasing power into the future. And so those. So it's not just the mining operations that would increase their output, but also all the people holding gold around the world, if they become convinced, oh, it's going to drop to $10 an ounce in five years, they would sell it now. And so that's where, like, quote, the new supply would come from. It'd be like a bunch of mines just got activated around the world with zero extraction cost. Like, all you got to do is go up to a safe and turn the thing a few ways, open the door, and there's a bunch of bars of gold sitting there. That's a real easy way to mine gold compared to digging into a, you know, a mountain. Okay, so that's the sense in which the price of gold could drop a lot, regardless of, like, the cost, the physical, you know, processes of extraction. Okay, so that's the way to just think through those. Or at least I've given you some ideas on the framework you might use, and you can play with it in your head and do whatever assumptions you want. One last point with all this. Imagine, you know, we have a scenario like that, like, oh, people think that the aliens in five years are going to start giving us oil, crude oil at $10 a barrel. And how's that going to change our current production structure and operations? What if then when five years comes, the aliens say, oops, sorry, you know, we talked with our elders, and you guys aren't ready for this yet. We don't, you know, humanity's not yet mature enough to have this kind of cheap energy. We'll come back and check in 20 years. Why don't you guys read some more philosophy in the Gospels because I'm sure the aliens are Christian, right? So what happens then? Oh, now humanity's in a pickle because we just burned through literally a bunch of crude oil that we shouldn't have based on erroneous expectations and views as to what this current state of the economy was. All right? And so what would happen at that point is there would be a massive drop in the standards of living, right? People would have been living it up, driving SUVs, you know, taking flights and whatever because jet fuel would be so cheap. And then, you know, once the rug pull happens, the prices would sky. You know, the price of crude would skyrocket because now we just burned through all of our stockpiles thinking we were going to have basically unlimited cheap oil delivered by the aliens. Okay? And so, you know, oil skyrockets, gasoline prices of things that are energy dependent skyrocket, and then we have a period of privation. So that when you, when you see how that works, is loosely analogous to what Mises says happens in a standard business cycle that in the boom phase, because of monetary inflation from either the central bank and or the commercial banks operating in league with it, floods the market with cheap credit. Entrepreneurs expand long term production projects, erroneously believing they're going to be profitable. Everybody feels wealthy businesses are bidding away workers from their previous jobs. So wages are rising, dividends and profits are up. Everybody feels great. But physically, what's happening is the society is consuming its capital. And so then once reality reasserts itself and they realize, oops, we've made a terrible mistake, now privation sets in. Okay, so again, these fanciful scenarios, if you just add the element at the end, what if it turned out their expectations were wrong? Oops. And then you can go through and, you know, deal with it that way. Okay, I will stop there. Thanks for your attention, everybody. I hope this was helpful. See you next time. Check back next week for a new episode of the Human Action Podcast. In the meantime, you can find more content like this on mises.org. Sam.