The Brothers Austrian

Below is a letter that I sent to John Mauldin after finishing his new book: End Game. It is well worth the read. I encourage everyone to read it in order to help understand the reality of the U.S.’s fisical situation.

John

End Game was fantastic. On par with Bulls Eye Investing.

I understand and appreciate the way you present some complex material in a very readable fashion. However , as an Austrian I am a bit frustrated with our representation in the book.

 I am not challenging your viewpoints so much as challenging the way you presented Austrians on page 149.

Mises lays out how human actions intertwine to create a price system based on profit and loss. Human actors vote with their wallets by acting (spending) or not acting (saving). All of this is then under the broad umbrella of a naturally forming price system. The key to a well functioning price system are interest rates.

Austrians contend it is not possible to cobble together the complexity of the market arrangements into aggregates because the market (human assessment of value) is too complex to simplified into a formula. Some capital may be intended to create goods and services for sale tomorrow and some for 10 years from now (Lew Rockwell). Certainly for the past 2 decades we have not had a free market economy because we have had a manipulated price system through the Federal Reserve’s influence on short interest rates. This manipulation leads economic actors to make capital allocation mistakes in droves (malinvestment) which was the ultimate cause of this continuing crisis.

So, you are correct. This is certainly an experiment. The consumer is overleveraged and trying to save but the Fed is trying to manipulate human beings by influencing their capital allocation decisions. The “seen and unseen” (Henry Hazlitt) effects of this have already been disastrous and I think Austrians are petrified because historically we know when side effects to accumulate to the point of financial panic and ultimately a sovereign debt crisis you often get wars.

I really hope that you give a full Austrian viewpoint sometime in the near future in you “Outside the Box” letter.

The free material is great so I voted with my wallet and purchased your book. Keep up the good work.

-Judson Ames

MisesBeliever End Game, Federal Reserve, John Mauldin

The move in silver yesterday blew my mind. There was nothing in the (official) data that would suggest the CPI numbers were above market expectations. The currency markets were relatively sanquine….gold was quietly up 0.85%….but silver, silver was ripping. Closing the the day up over 3%. If anyone has any idea why, I am all ears.

With that said there was an entertaining silver tail posted on Zero Hedge this moring posted by pen name Bruce Krasting. Here is the jist of the story:

For about a year or so back around 84 I ran Citybank’s (now C) bullion vault at 399 Park Avenue. This was just a corporate screw-up. The guy who had management responsibility for the vault got transferred to Hong Kong and so there was a hole in the Org Chart. I was running other profit centers and that was working out so they gave me another. Fortunately for me there were two guys who ran the vault and did a fine job at it. There was a lot of money to be made receiving/storing/shipping bullion.

One of the things I did was take people down to give a tour.  It was a pretty good show. In my mind’s eye it was as big as a basketball court. There were sections that had gold and palladium. Tons of it. But the staggering thing was the silver. It was piled in 200lb bars up to ceiling. They moved it with big forklifts. Hard to describe the scope of it.

This was Bunker Hunt’s silver. It was a good chunk of the 100mm ounces he bought.

The Hunt story blew up in late 79. Keep in mind that numbers then are like today except add another zero. Citi was a very big lender to the Hunts ($115mm). First Chicago was out $70mm. National Bank of Dallas had syndicated a loan for $450mm. All the banks had a chunk of that swill. The worst part was the broker loans. Pru Bache had margin loans of $200mm, Hutton another $100mm and the idiots at Merrill had a $500mm out on margin.

So this was a systemic problem. (Again, a rounding number today)

Paul Volker had taken over the Fed just a few months before all this happened. Inflation was raging at the time. It was his intention to shut that down and he ultimately did. And along the way he killed the Hunts. He also killed the banks that financed the Hunts. He told the banks to eat the losses and store the silver until it could be sold without consequence. Volker played hardball with the likes of Walter Wriston, and they all backed down. Paul made his “rep” at the expense of the Hunts.

The run up in silver (and gold) made Volker look bad. The PMs were the daily signs of his inability to rein in inflation. So he crushed them. Volker set the stage with this one. It was understood that he was not to be messed with. Later he crushed the bond market. All that because inflation got a bit out of hand. Funny how history keeps coming back at you.

So that’s my Bunky story. I’m sure that there are still mountains of silver under Park Avenue. But all that Hunt silver is long since gone by now.

One Saturday morning at 4 am back then I get a call.

Are you BK?  
Yes.

Do you work for Citybank?  
Yes.

Are you the guy responsible for the bullion vault?  
Yes.

There has been an accident. The Number 6 southbound local train has derailed at 53 and Lex. The lead train crashed into the wall. The crash has set off every alarm in your vault. The noise is deafening. What should we do?  
Call the police!  

This is the police!

It took hours for me to figure out how to turn off an alarm system on a Sunday morning. The cops were pissed. Just old stuff…

MisesBeliever Uncategorized

Last night I picked up We Who Dare to Say No to War and turned to a random speech. I ended up being awe struck at the foresight of Vice President Henry A. Wallace. Wallace knew that post WWII America would be turning point. He saw dangers of a growing military industrial complex at about the same time Congressman Ron Paul was born (ironic). The full speech can be found here but I want highlight a few paragraphs and add in what I see as the parrallel’s to where we stand today. The thought experiment sent shivers down my spine.

March 12, 1947 (September 11th), marked a turning point in American history. It is not a Greek (Egyptian) crisis that we face, it is an American crisis. It is a crisis in the American spirit. Only the American people fully aroused and promptly acting can prevent disaster.President Truman (Obama/Bush/Clinton/Bush/Reagan/Carter/Ford/Nixon/LBJ), in the name of democracy and humanitarianism, proposed a military lend-lease program. He proposed a loan of $400,000,000 to Greece and Turkey as a down payment on an unlimited expenditure aimed at opposing Communist (terrorist) expansion. He proposed, in effect, that America police Russia’s (Al Queda) every border. There is no regime too reactionary for us provided it stands in Russia’s (Al Queda) expansionist path. There is no country too remote to serve as the scene of a contest which may widen until it becomes a world war.President Truman calls for action to combat a crisis. What is this crisis that necessitates Truman going to Capitol Hill as though a Pearl Harbor (September 11th) has suddenly hit us? How many more of these Pearl Harbors (September 11th) will there be? How can they be foreseen? What will they cost?

Now I highlighted, underlined and reread this paragraph three times:

I say that this policy is utterly futile. No people can be bought. America cannot afford to spend billions and billions of dollars for unproductive purposes. The world is hungry and insecure, and the peoples of all lands demand change. President Truman (Bush/Obama) cannot prevent change in the world any more than he can prevent the tide from coming in or the sun from setting. But once America stands for opposition to change, we are lost. America will become the most-hated nation in the world.

Two road diverged…And so it goes.

MisesBeliever Government Spending, History, Interventionism, Liberty, Uncategorized, mises.org

Beep: (Mr. Market) We need to totally change the way governments operate. Eliminating the tax cuts does the opposite by putting more money back into the government’s coffers. We need to stop enabling this crony capitalism. Isn’t the marginal productivity of every $ spent by the government less than the productivity of every dollar spent by a countries citizens? Why not cut spending instead? Why not stand up and say hey, this is BS? Politically you seem unable to do this so I will force a restructuring upon you! I sincerely hope liberty survives my sword, but that is in your hands, not mine. “

Mr. Market is sending signals to us. He is shouting the crony capitalism induced spending needs to stop!

Almost every page of every bill passed is a small fee on many that lines the pockets of a few. It is pure crap. It is pure crony capitalism (not to be confused with actual capitalism).Take the body scanners in the airports for instance.

openmarket.org: “The TSA full-body scanners are a particularly egregious case of this. George W. Bush’s former Homeland Security Secretary, Michael Chertoff has a personal financial stake in the production of full body scanners produced by Rapiscan Systems (a subsidiary of OSI Systems). Notably, the CEO of OSI Systems recently joined President Barack Obama on the recent trip to India. No doubt it was a great opportunity to convince Obama of the “necessity” of full-body scanners in the ironic battle to protect freedom.”

Ah yes, this is a change! A change from covert crony capitalism to overt crony capitalism.

I thought perhaps this is what the tea party was suppose to be about, but sadly I believe the message sent in November has been lost in the shuffle. Ron Paul seems to thinks so as well, as illustrated by his reluctance to join the tea party coalition.

Why not just bring the troops home instead of fighting illegal foreign wars? Why not empower our citizens to let them decide for themselves how to save money? Don’t we have the classic ant working all summer while grasshopper lounges issue here? Watch this story play out in Europe and next in the U.S.

The EU has empowered a few, at the expense of many, and has, ironically enough, done so in the name of freedom. Well that sham of an experiment is coming to an end, and trust me, it will end badly! Sadly, I must contend, that we will not get any real change until Mr. Market forces change upon us. Now we are seeing the slow death of freedom and democracy in front of our very eyes in the EU. Perhaps Mr. Market intends to deal a quick death blow that will allow an expedient restructuring, however I don’t see that as a likely outcome. There too many pockets being lined with cash. There are too many, with too much at stake, to allow real reform to occur.

Maybe we can avoid the type of pissed off nationalism that inevitably is channeled toward the “others” by governments and consequently avoid the outbreak of the ultimate destruction of liberty… aka wars.

MisesBeliever Government Spending, Interventionism, Liberty, Politics EU debt crisis

I am tired of seeing negative, fear mongering press in regards to Tom Wood’s recent book, Nullification. Here is a recent article posted at the mises.org summerizing his views.

Nullification was successfully used BY THE NORTH, to avoid enforcing the Jefferson’s embargo and (ughh Jefferson….one of your two bad decisions) the Fugitive Slave Acts. As per normal however, society focuses on what the state taught us in its textbooks.

What most people don’t know about nullification is that the states believed they had this power under the Constitution. This fact was used by the Federalists to the opposing anti federalists to enter into a COMPACT, thus creating the United States of America. Kentucky specifically reiterated this view point before Marbury v. Madison (establishing judicial review) with the Kentucky Resolutions which rejected the odious Alien and Sedition Acts (The Pricipals of ’98, audio of history lecture by Tom Woods).

Say the Federal government instituted something like Arizona’s new law that, in my opinion, allows for an unlawful search and seizure on national scale. Nullification would provide the states with recourse.

The classic argument from those in the legal world is that that this is why we have the judicial branch. Really, so what they are telling me is that the states agreed to a binding agreement in which the federal government would be the referee for federal laws? That’s like letting Joe Montana be the booth review official for all Super Bowls. Wait a minute, what if the 49ers are playing in the Super Bowl? Well, what if the legal issue is a states interpretation of the Constitution versus a federal interpretation of the Constitution. Can we really expect a federal branch to relinquish its power and defer to the states?

History shows that the states absolutely believed Nullification was constitutional. In fact Hamilton used this as a point of encouragement to get the states to sign.

I believe that Nullification can be used as a peaceful means to put a true check on Washington.

Please, before jumping to conclusions to about Nullification, read Tom Wood’s book or at least read this article. Perhaps you’ll shed your preconceived notions that were dumped into your head year after year in grade school.

MisesBeliever History, Liberty, mises.org, nullification

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 the bill? Probably more than meets the eye…at first.

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