An Hour With Nobel Prize-Winning Economist Milton Friedman.

Original Source: THE CHARLIE ROSE SHOW

CHARLIE ROSE, HOST: Welcome to the broadcast. Tonight, an hour with Nobel Prize-winning economist Milton Friedman.

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MILTON FRIEDMAN, NOBEL LAUREATE, ECONOMICS: The stability of the economy is greater than it has ever been in our history. We really are in remarkably good shape. It`s amazing that people go around and - and write stories about how bad the economy is, how it`s in trouble, how its foreign debt is going to kill it or its domestic deficit is going to kill it. Neither one is going to - is going to kill it.

The domestic deficit is a bad thing if it reflects an increase in government spending, which it partly does. The real problem with government is not the deficit. The real problem with government is the amount of our money that it spends.

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CHARLIE ROSE: Milton Friedman for the hour, next.

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CHARLIE ROSE: Joining me now is Milton Friedman. He is one of the most influential economists and public intellectuals of our time, a champion of the free market economy. His research into monetary and price theory has changed the way we think about issues like inflation, unemployment, the money supply.

He was awarded the Nobel Prize for economics in 1976, served as an economic adviser to Barry Goldwater and Presidents Nixon and Reagan. He and his wife Rose have also been tolerance advocates for the issues such as drug legalization, Social Security reform, and education, especially school choice, and vouchers.

This year, they celebrate their 50th anniversary of his idea to create school vouchers. He is currently a senior research fellow at the Hoover Institution and professor emeritus at the University of Chicago.

It is an honor to have him back on this program, because he is a very young 93. Welcome.

MILTON FRIEDMAN: Glad to be here.

CHARLIE ROSE: It`s great to see you. I want to look ahead first, and then we`ll look back for the rest of this program. Tell me how you see today the American economy, where there has been some growth beyond expectation, and how it fits with the global economy, with the dollar gaining more than people expected it to, the euro doing worse, the rise of China. Give us a sense of how we look at this.

MILTON FRIEDMAN: Well, the - the United States is at the peak of its performance in its history. There has never been a time in the United States when we have had the state of prosperity, its level and its spread that we`ve had in the last 10 or 15 years. There`s never been a 15-year period in which there has been a little -- as little fluctuation in - in prices, in - in inflation. Inflation has stayed around 2 or 3 percent or less for the last 15 years. It`s -- it`s unprecedented.

CHARLIE ROSE: And you give great credit to Alan Greenspan for that?

MILTON FRIEDMAN: I certainly do. I think monetary policy is primarily responsible for it.

CHARLIE ROSE: Are you surprised that the economy has done as well as it has when we are having a record trade deficit, the current accounts deficit, and record fiscal deficits?

MILTON FRIEDMAN: Not at all. Because neither of those necessarily impedes our progress. First of all, the trade deficit is not -- it`s not a deficit in another sense. It is a capital surplus. You look at the so- called trade deficit. And on the books, the U.S. is a borrower. We owe money to the rest of the world. But that`s because the books are kept in a misleading way. If you look not at the capital - not at the balance sheet, but at the income account, and ask how much income are we getting from foreign-owned assets, from assets that we own abroad...

CHARLIE ROSE: Right.

MILTON FRIEDMAN: . and how much do we have to pay to people who own assets here, it turns out that the outflow of funds from our -- to foreigners is exactly equal, or I say exactly, you know .

CHARLIE ROSE: Right. Right.

MILTON FRIEDMAN: . roughly equal to the inflow. Although on the books, the value of our assets, of the assets that we own abroad is less than the value of the assets that they own here on the books, it yields as high an income.

CHARLIE ROSE: But there are constantly people saying -- making this argument. We don`t save enough. We borrow too much. And we consume too much. On the other hand, the countries in Asia, especially which have a lot of American dollars, lend, don`t spend, and they are in a better position than we are.

MILTON FRIEDMAN: Well, but the statement that we don`t save as much is because we measure savings not by these income flows. We don`t value our assets appropriately. Our - our foreign-owned assets are worth more than they are valued on the books, because they are yielding a higher return. They are risky assets, and that`s why.

The thing that the United States has, it`s a one place in the world where people around the world can go for security, for political security. And nobody who invests his money in the United States is afraid that it`s going to be taken away from them by the government, except through legal taxes and so on.

CHARLIE ROSE: They want our debt because they think the American economy is more stable politically and economically than any other .

MILTON FRIEDMAN: That`s right. They want no-risk money. You`re -- let`s say you are a Chinese entrepreneur. And you`ve got -- you`ve - you`ve been one of those lucky people who have built up a lot of money. Do you want to keep it all in China? Don`t you think you want to have a little no-risk fund in the United States? So that I think we are -- we are the - a market for people who want no-risk funds.

CHARLIE ROSE: OK, but there are many people who will argue that it`s great danger for us that .

MILTON FRIEDMAN: Why?

CHARLIE ROSE: . that - that South Korea and Japan and the United States and Taiwan hold so many American dollars because if they become disenchanted, they might dump it.

MILTON FRIEDMAN: Why - who -- how would they dump it?

CHARLIE ROSE: They would sell it back.

MILTON FRIEDMAN: Sell what?

CHARLIE ROSE: The interest on the debt that they have. The dollars they have.

MILTON FRIEDMAN: To whom? To whom would they sell it?

CHARLIE ROSE: Your point is that there is no buyer.

MILTON FRIEDMAN: Well, there are buyers, of course there is always a buyer. At what price?

CHARLIE ROSE: But wouldn`t that be destabilizing?

MILTON FRIEDMAN: Who would lose money? Who would lose money on that kind .

CHARLIE ROSE: Wouldn`t that be destabilizing? Wouldn`t that suggest a lack of confidence in the American economy?

MILTON FRIEDMAN: Yes, it might. But the people who would lose by it would be the foreigners who held that and who dumped those dollars.

CHARLIE ROSE: Well, then are they in a frozen position then, so that they - they have no flexibility?

MILTON FRIEDMAN: They are not in a frozen position. They are in a position they want to be in, because that`s why they are holding these assets. Because they are afraid of risk, of political risk.

CHARLIE ROSE: What happens if they would allow .

MILTON FRIEDMAN: And in general, let`s suppose foreigners start dumping their assets here. They would dump them at distressed prices. They would have no .

CHARLIE ROSE: Once it started (INAUDIBLE) would begin.

MILTON FRIEDMAN: And who would buy them? The people at home, here, the people in the United States, who had confidence in the United States. So what you would have would be that the assets would go from weak hands to strong hands. It isn`t going to happen, because there is no reason for foreigners to dump the dollars.

CHARLIE ROSE: But nothing is certain, is it? I mean, certainly in economics .

MILTON FRIEDMAN: Of course not. Nothing is absolutely certain. But you can be pretty damn sure of what is likely to happen and what isn`t.

CHARLIE ROSE: What might -- but argue the other side. What might cause someone to say we`re holding too many dollars and - and we don`t think it`s healthy.

MILTON FRIEDMAN: There is only one thing that would cause them to do that, and that`s if we engage in inflation.

CHARLIE ROSE: But hasn`t .

MILTON FRIEDMAN: If our monetary authority did not -- lost its good behavior and started to print too much money. That might do it, but that`s not going to happen.

CHARLIE ROSE: Some argue that the dollar has been stronger because American interest rates have gone up and that has put greater -- added strength to the dollar. Do you see it that way?

MILTON FRIEDMAN: Yes, that has been a factor that has added strength to the dollar. But the dollar was rising…