The Brothers Austrian

The below respons was published on The Big Picture Blog in response to Not deflation but more disinflation should lead to QE2.

A 50 year long expansion in credit, which was helped along by securitization, has led the master builder dilemma on grand scale. The master builder dilemma occurs when entrepreneurs and consumers alike (metaphorically) think they have enough bricks to build a house. At some point they realize they don’t have enough bricks (pull back in lending) and have to  make some difficult decisions as to how they should not proceed. The builder thinks to himself, man if I had only known, I would have build my home a little smaller.

Currently master builders are confused. Do I expand my business? Do I build a home or do I rent? Do go back to school/get retrained or is my housing construction job going to come back? Do (corporations) buy back shares our build up cash? 

Some of the decisions will ultimately end in malinvestment due to the utter confusion that manipulated time preferences for money have caused (interest rates).

The US has not been a free market since the late 1800′s when the railroads went bust and the US was forced off its prior attempt fiat currency’s (the Greenback). I am a believer that we need quick forest fire (1920 recession) and not an ice age (the Great Depression). Monetarist’s and Keynesians prefer the ice age therefore Austrians are still out numbered. The Fed’s recency bias has falsely led them to believe they can manage us out of this crisis. Essentially the monetary authorities are saying they can manipulate us like puppets and control how we allocate our capital. Decades of false conclusions by the Fed have now culminated into another DEPRESSION. Now the bill is coming due. The question is how much of our liberty will used to pay?

MisesBeliever Deflation, Federal Reserve, Liberty

Contary to popular belief what the market needs is deflation (See Murray Rothbard and the Deflation Bogey), however as illustrated today by Fed’s new QE (money printing) software patch, the Fed has no intention of letting deflation run its course. This line of thinking is like getting a Windows Vista update and assuming that it will solve all the problems of a completely defunct operating system. Therefore getting rid of the Federal Reserve is analagous to junking your Windows Vista in favor of Windows 7 or in our case, the Gold Standard.

MisesBeliever Deflation, Federal Reserve, Gold, Inflation

I have to admit … Paul Krugman is a great poster boy for the “liberal” left.  Using his New York Times column as a sounding board, he has successfully built a strong following.  I don’t inherently take issue with his politics or his bloviation.  I do take issue with his duplicitous use of economics to advance a “duh this is the only right course you idiots” political agenda.

At one time, Krugman was an impressive economist with legitimate academic bona fides.  Krugman parlayed this into a leading college textbook and New York Times column.  Without this academic background, he’s just another political shrill to ignore.  What’s scary, though, is that he continues to masquerade as a legitimate economist.  This gives him the “legitimacy” to write as a qualified expert on macroeconomic politics.  The problem is that he no longer maintains any semblance of consistent economics – even with his own work.  Instead, his ego led him to use his column as a bully pulpit to attack those who think differently politically – on any issue.

My opinion is based on numerous pieces of evidence where Krugman has said one thing to promote his political agenda and then used the same exact argument to tear down those who disagree with him.  The latest example came to me via Stefan Karlsson in his post Krugman Misleads About Reagan.  You can read the whole article (it’s pretty short), but here is the gist.

It is interesting that he assigns to monetary policy such a great role in driving the housing sector. When discussing the 2001-06 housing boom, Krugman and other Keynesians have denied that interest rate policy played a significant role and instead claimed that “lax regulation” caused the bubble.

Here are a few other times Krugman has been called out for similar chicanery.

• Social Security
• Budget Deficits
• Unemployment Benefits
• Filibusters (not economic based)

For an in-depth analysis of his column from 1997 to 2006, this report from Econ Journal Watch is quite illuminating.

Teacherman General deficits, krugman, reagan, social security

On 7/19/2010 Barry Ritholtz, published a scathing review of Tom Woods recent book, Meltdown, by Prof. Prof. Herbert Gintis which briefly details why Austrians predicted the crash and also why the believe they know why it occurred.

Gintis showed utter lack of understanding of Austrian economics and history in general however I don’t really care to waste my time tearing his argument apart. I am sure some of my pales over at the Von Mises Institute will do that for us much better than I can. When they do I will post the link on our blog.

I would like to share  his prognosis as to how we can fix economics, which he provides at that the end of the review:

“I think it likely that macroeconomics will not become scientifically presentable until we realize that a market economy is a complex dynamic nonlinear system, and we start to use the techniques of complexity analysis to model it. I present my arguments in Herbert Gintis, “The Dynamics of General Equilibrium”, Economic Journal 117 (2007):1289-1309.”

I get it, the evidence is not presentable because economists do not understand that they need to create dynamic models that are more complex… Whew, now that we know that, we can have all of our economist stop building those “linear” models and get to work creating dynamic super models that will keep the economy in less volatile state. Geez, how come all of you economists didn’t realize the economy dynamic and complex?

Barry claims that Fannie and Freddie were not the cause of the housing crisis because prices rose globally but Barry, didn’t all the countries that had housing booms have similar versions of Fannie and Freddie in some form (tax break’s, FHA loans etc.)? I am not saying that Fannie and Freddie caused the crisis solely but they encouraged malinvestment along with artificially low interest rates.

Gintis claims that there is little evidence out there that the Austrian theory works however I do not concur on that point. There is a ton of evidence out there about GNP growth (or the equivalent there of) under the gold standard going back hundreds of years. See Murray Rothbard’s, “A History of Money and Banking in the US, Part one, pg 159, The Gold Standard Era With the National Banking System. Despite what the history books say, it was one of the most prosperous times for this country. Low unemployment, falling prices, rising real national product (3.7% per annum), and skyrocketing productivity.

Mr. Hickey, please chime in. I think, at least you must have cracked open Economics in One Lesson or The Theory of Money and Credit, or one of my personal favorites, the introduction the American’s Great Depression (written by Joe Salerno).

MisesBeliever Real Estate

Around the street the debate rages whether we are in an inflationary or deflationary environment. I think, this crisis is deflationary in nature, however, in the long term, I believe that we will be QE’ed to death. As the deflationary forces (housing, credit cards, wages, and eventually even commodities, again!) get a tighter grip on the economy politicians will continue to the pull the QE lever (print money). Some central banks will go too far (maybe some won’t), but it is likely that inflation will rip here in the US regardless.

Below is a great letter to David Rosenberg that was published by Glusken Sheff today, in which “Rosie” reader lays out in laymen terms why both deflation and inflation will be the topics of conversation for years to come.

“David,

Great work lately, spot on as usual. A few observations from Upstate NY, a place where the economy is always depressed, since cash for clunkers not many new cars on the road. A new health club opened, very nice, we live in the high rent part of town, (my wife is a health club instructor and they are hiring), but no new sign-up’s or slow sign-up’s. In other words, no recovery here. FYI, both parents are brokers at major wirehouses, I can assure you the income theme is alive and well and one will attest that the gold fever is coming to life, but nowhere near bubble territory. Your deflation theme and charts are right on, prices everywhere except for the grocery store are low. I side with you on deflation, all evidence points towards it.

However, I also believe inflation is a fat tail event that is not understood fully yet. I believe we will go from deflation to inflation very quickly thanks to QE from the Fed. Bear with me on this one, in The Depression: A Diary, Benjamin Roth feared inflation which never happened, but that debt was never really paid off, we grew our way out of it, basically. But, we did have a bout of higher prices in the 50’s, a small fat tail from the 30’s? When the 60’s hit we spent on Vietnam to the Great Society and that created a shorter fat tail event, i.e. the 70’s stagflation. Is it possible that inflation is the next fat tail as the fat tails are picking up steam and happening at an increasing rate? I say this because sovereign default can be prevented through printing, avoiding technical default, while it is default in my eyes, still you get the point.

Couldn’t we suffer inflation through QE or dollar devaluation because of the monetization of our debt? From my lens this fits into your scenario of deflation and into Bernanke’s need to create inflation. I love your work, you are right and most of us believe, I own treasuries, gold and income securities and am very happy because of your guidance.

Thank you”

Bottom line, the next decade will not be about how much your capital (or your banked wages) appreciates but rather whether your capital will be returned to you at all. I don’t believe the street is positioned for deflation at the moment and here are three reasons why:

1. Everyone and their brother has long term bullish view on oil and base metals. It seems to me that not too many people are underweight commodities and therefore the air could come out of the asset class rather quickly.
2. 1% of money managers were bullish on Treasury’s at the start of the year.
3. Everyone is long emerging markets, which is the same theme that gives their long-term bullish outlook on emerging markets.

Therefore, I think investors should have a healthy balance of Treasury’s, gold and defense stocks. The teeter totter is tilted too far towards the inflation trade and will swing towards deflation very quickly. About the time everyone is talking about how you must own MCD and oil is trading at $50, position for the teeter totter to swing towards (hyper?) inflation.

MisesBeliever Inflation commodities, deflation, Inflation, treasury

Absolutely furious that any governor would sign immigration law which is the most absolutely cut and dry infringement upon liberty that I have ever seen. To be able to demand proof of citizenship? Sounds like Nazi Germany to me.

Granted there are many people who are here illegally which I do not like. However human beings will naturally seek to improve their lives which I must sympathize with as a student of praxeology. There is nothing wrong with trying to improve the well being of your family.

This law is a symptom of two failed government policies in my opinion: the war on drugs and the lack of a secure boarder.

1. Have really won the war on drugs or just caused more violence and health hazards (cutting of drugs with harmful agents as less slip by the various enforcement agencies)?

2. Why can’t we secure our boarders? We can move 200,000 troops into the Middle East in a year but we can’t build a wall a 1000 miles long?

I better see the 4 or 5 Republicans pushing for liberty come out strongly against this. I reiterate, I did not the leave the Republican Party, the Republican Party left me.

And why did Obama not mention the words freedom, or liberty when coming out against this?

MisesBeliever General immigration, praxeology, republicans

Nickel and Dimed vs. Life at Wal-Mart by Charles Platt

I was recently having a conversation about insurance costs with a friend who is a senior at Rutgers University. Somehow the conversation digressed to the topic of Wal-Mart. The Rutgers student listed all the classic knocks on Wal-Mart: they treat their employees like a crap, pay them nothing, do nothing good for American manufacturing. This commentary sounded all too familiar. My freshman year at Syracuse University I had similar opinions of Wal-Mart after reading Nickel and Dimed.  My very first college paper was based on the book (man, if I could only find that assignment to post here). Nickel and Dimed is essentially a tale of how hard it can be to live off minimum wage and how companies exploit laborers … it’s modern day, The Jungle. After reading the author’s tale I had a classic case of rational ignorance. The story seemed to make a well researched “Wal-Mart is evil” argument, so was it really worth my time to find other sources on working life at Wal-Mart? The books thesis was in line with what seemed to academics a consensus view; at the time that good enough for me. About two years later I watched what I consider to be one of the best South Park episodes ever: Something Wal-Mart This Way Comes. Again…Wal-Mart… evil.

Fast forward 7 years to a time where I am more in tune with various economic schools of thought and viewpoints. I came a across a podcast on Econtalk with Russ Roberts in which he was interviewing a man who was retired editor. Roberts’ guest had decided to take up position at Wal-Mart and subsequently written various articles on his experiences (Life at Wal-Mart by Charles Platt). Here is a synopsis of the podcast:

Charles Platt, author and journalist, talks with EconTalk host Russ Roberts what it was like to apply for a job at Wal-Mart, get one, and work there. He discusses the hiring process, the training process, and the degree of autonomy Wal-Mart employees have to change prices. The conversation concludes with a discussion of attitudes toward Wal-Mart.

What Platt had to say seemed to make sense.  His points were further supported by Robert’s commentary on the general economics of Wal-Mart. I started piecing my Wal-Mart experiences together in my head. All in all, I would have to say I enjoy Wal-Mart. One stop shop, low prices, and great service. So, is there enough evidence that Wal-Mart exploits it labor for me to shun Wal-Mart?

The stigma is that Wal-Mart workers are treated like crap and are unhappy. After hearing about Platt’s experience, I now pay attention to the demeanor of Wal-Mart employees when I shop there. From my experience going to Wal-Mart, their employees, so far, have seemed pretty happy in general. Now, after reading Nickel and Dimed there were a few years that shopping there gave me the heaby jeebies but I didn’t shop there any less. There has always seemed to be some a disconnect, for me, between the experience that I read about in Nickel and Dimed and my personal experiences at Wal-Mart.

I would guess that good portion of recent liberal arts graduates have read some version of a “Nickel and Dimed”. I think Nickel and Dimed misses the human aspects of why people work at Wal-Mart, in other words, what their living situation before the enter employment with the company.  Therefore, it tends to mislead readers into believing that most other Wal-Mart employees dislike their job as much as the author of the book did. Certainly there are people struggling to get by that work at Wal-Mart, but is it right to pin the blame for their struggles on Wal-Mart? I think not. The Platt article may change your mind on Wal-Mart and it may not, but either way it is worth getting another viewpoint on the “Evil Wal-Mart” story that seems to so prevalent in university lecture halls across the country.

MisesBeliever General austrian school, Charles Ploot, Economics, education, Nickel and Dimed, Russ Roberts, working at Wal-Mart

If spending is the new conservatism, please label me a liberal. I consider myself a liberal in the classical sense of the word. Below is excerpt from Amity Shales “The Forgotten Man”, an absolute must read.

On August 3rd 1938 George Gallup, the pollster reported that Willkie would have the edge over Roosevelt if the election was held that day…Back home in Elwood, before a crowd of 200,000 and with weather 102 degrees in the shade, Willkie asked the public to think about what it meant to be liberal . Was being liberal merely a left progressive? OR was a liberal someone that believed in liberalism in the classic sense, in the primacy of the individual and his freedom? Willkie railed against Roosevelt’s “philosophy of distributed scarcity.” …and he argued, speaking of both the United States and Europe, it a was a weakness ”that people reached for dictators and concentrated government power…”

Currently it seems to me that both Democrats and Republicans have both headed down the path of concentrated government power and away from liberialism and ultimately liberty. Classical liberalism is making a comeback and has been an undertone to the recent tea parties. The libertarian movement, which is ultiminately one in the same with Austrian economic policy , is not a conservative undertaking in my eyes (as most pundits seem to think), rather the movement embodies what it truly means to be “liberal”.

MisesBeliever Uncategorized

Zero Hedge notes that gold has reached an all time high in Euros. Today, the DXY threatens to break out and Elbert Edwards of Societe Generale says that the Euro will fall 25% versus the US Dollar (I agree, but, wow, seems hard to believe with helicopter Ben at the helm). The market confusion volatility in currencies is the unfolding of a major global currency crisis.

Meanwhile, back at club med in Greece, customs agents go on strike,  exacerbating Greece’s economic woes by hindering exports. Greece’s citizens are rightfully angry that their wages and lifestyles will likely have to be trimmed back. After all, most of Greece’s citizens made the best decision for the families by working for the federal government (Fed employees are 20% of Greece’s workforce). Now they will likely have to except a pay cut or be retrained in another industry. There simply is no easy “human” decision to be made.

Meanwhile, gold is attempting to return to its real worth, zero, which would place gold at a value of 6,000 US DOLLARS! At which time the governments of the world will blissfully ask that its citizens hand over its metal in exchange for toilet paper as it did in the 1930s.

Andrew Jackson is howling from his grave as we speak, while Nicholas Biddle lies in his with a smile.

MisesBeliever Gold, Inflation dollar, euro, fiat currency, Gold, greece

Peter Schiff’s campaign headquarters was packed to the point where you literally could not move, mind you it was on a blustery 19 degree Thursday night!

Here is some video footage of the event.

MisesBeliever Uncategorized