The Brothers Austrian

There are many, many, micro inputs that collectively have combined to culminate into this massive credit crisis. The creation of the Federal Reserve, coming off the gold standard, the invention of the credit card, the invention of asset backed bonds, subprime lending, etc etc etc. Who could have ever thought that all of these things would culminate into a crisis this big? Well Hazlitt knew the problem was on the horizon in the 1950’s and make no mistake, Hazlitt was woefully aware of how devastating inflationary policies could be.  Have we forgotten about what the fall of the German mark  ultimately lead to? The below statement actually strikes the fear of god into me!

“Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.”

-Henry Hazlitt (Economics in One Lesson)

· Discourage prudence and thrift- government encouraging spending ?

· Gambling and speculation -Flipping houses, LBO’s-?

· Desperate remedies-monetizing debt-?

I believe that the above statement by Hazlitt not only summarizes how we got into this “credit crisis” but also summarizes where we will end up. Monetizing debt is just the start of the desperate remedies. I fear that the impudence of the governments of the world will lead to further instability. Now, as brutal is this instability may end up being it is my job, I still look for future investing opportunities.  That’s why I have coined the GGO Investment Theory- Guns, Gold & Ordinance (perhaps we should substitute oil for ordinance?). That is not to say that I recommend running out and buying stocks, because I actually wholeheartedly believe that equity indexes will cough up another 40%–that’s right I said 40%–within a year. When the cough up comes, however, I will be ready to pick up some defense stocks on the cheap. As far as gold goes, well you better have some of that before that cough up comes, because otherwise you will be paying up to own the bullion.

Wendall Wilkie Gold, Inflation, Stock Market defense stocks, economics in one lesson, Gold, Hazlitt, Inflation, oil

My brother has posted a few times lambasting the higher education system, especially at the elite level, for propagating a broken economic system.  Worse, their temerity leads them to believe that they can diagnose and fix macroeconomic systems.

The seminal work underpinning my brother’s revulsion is The Pretense of Knowledge, by Friedrich A. Hayek.  This is the name given to a speech by Hayek in 1974 in a lecture to the memory of Alfred Nobel.  In it, Hayek explains the limits of human knowledge, especially in relation to the infinite variables of a macroeconomic system.  As he says, “Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.”  Nevertheless, political economists tend to use rigid formulas, in a manner like the physical sciences, to analyze highly fluid macroeconomic settings.  Hayek notes, “Yet the confidence in the unlimited power of science is only too often based on a false belief that the scientific method consists in the application of a ready-made technique, or in imitating the form rather than the substance of scientific procedure, as if one needed only to follow some cooking recipes to solve all social problems.”

The inane pretense of the Federal Reserve and the Obama (and Bush, etc) administration that they have the knowledge to manipulate the monetary system without consequence is absurd. 

But when it doesn’t work, we can just blame the ‘free market’ — right?  Talk about moral hazard…

Teacherman Federal Reserve, Interventionism, Politics Federal Reserve, hayek, macroeconomic, monetary system, pretense of knowledge, sciece

I posted last week about the growing unease of the Chinese Central Bank toward its US investments.  Now China (along with Russia) has manifested its unease with a call for a new global currency, led by the International Monetary Fund.  As scary as this notion is, I wanted to highlight the growing unease with the US dollar.  While it appears unlikely that China is willing to take an investment hit in order the skewer the US, it is clearly setting up for a dramatic shift away from supporting the issuance of dollar debt.

How China Sees the World (Economist.com)

China understands that the only way for the US to service its debt is through monetization.  It’s unlikely that they ever imagined a US recession would lead to this type of monetary expansion:

As the US dollar currency in circulation approaches $1 trillion, China is finally trying to find a new safe haven for cash.

Is it likely that we will see another Bretton Woods soon?  I don’t think as it stands now.  But maybe, just maybe, China is setting the framework for a future day when it dumps its treasuries and punishes the US.  This certainly would be painful for Beijing, but what is this investment actually worth anyway?  It may be the perfect catalyst for a Shanghai version of Bretton Woods in 2010.  Could a new currency order with China leading the way be worth its investment loss?

Teacherman Federal Reserve, Inflation bretton woods, china, debt, dollar, global currency

“The chains of habit are too weak to be felt until they are too strong to be broken.”
–Samuel Johnson

U.S. consumption has driven global growth for years. South Pacific countries sold us their spare capacity which drove and modernized their economies at a seemingly unrealistic pace. Foreigners have been building dollar reserves for decades. Many of those countries have rightly realized that perhaps they should use those dollars to buy U.S. assets rather than hold treasuries. It is one thing to exploit foreign labor, but now foreigners have put their surpluses (their money/capital) to work buying up U.S. assets, thus exploiting us. Touché. Now, profits generated from the selling to the U.S. consumer go oversees rather than staying here.

The consumer was being squeezed on all sides entering into 2008. Higher fuel prices, falling housing prices, stagnant wages, higher unemployment, and rising food costs.

Household debt as a percentage of GDP is almost 100% as the below chart illustrates.

Pundits argued that rising household net worth would allow spending to continue forever and ever as net worth continued it climb in 2004, 2005 and 2006. Now household net worth is falling at an unprecedented rate. In 2008 household net worth declined an astounding to $11.2 trillion to $51.5 trillion (Random Factoid $trillion in household net worth vs. 600 trillion in outstanding derivatives in the U.S.).  In 2007, residential mortgages outstanding, in percentage terms   were equivalent to 78% of US GDP. In 2006 residential mortgages made up an outstanding 36% of total U.S. debt outstanding. When this crisis started in 2007 Gary Shilling said that we would need vacant supply to fall below 600k homes now he estimates that there currently are 2.1 million in excess supply. Shilling estimates that housing prices could fall anther 20% (ughh what’s that going to do to household net worth?).

A sad fact now apparent to most of us, the U.S. consumer is tapped and they are not coming back for years … not months. I am now realizing why the Fed has chosen to monetize this debt, clearly the people who have burrowed(or should I say lent…ah what the hell…both) can’t afford for the Fed not to.

Now let me get this straight…the Fed is going to buy back these mortgages via Fannie and Freddie, an issue treasuries to do so? Now the Fed is going to buy back treasuries (monetizing: printing money) to keep rates down so lenders can then make more loans to people who are insolvent? Meanwhile oil is walking its way back up the ladder towards $100 (granted I believe will break $40 once more) because oil is finite and fiat dollars are not. Food costs are not slowing the way they should if an economy is truly productive, wages are declining, productivity(…well is there such thing as productivity in Never Never land?) is declining and the government is scaring the entrepreneur back into his/her shell with taxes.

Jefferson is rolling over in grave as we speak.

Wendall Wilkie Federal Reserve, Free trade, General, Real Estate consumer, dollar, foreign labor, trade, treasuries

Have you ever stopped to think about how much efficiently you could have learned something? Or what about when you realize everything you thought you knew was wrong? I am sure some very smart people were convinced the world was flat and were quite perturbed when learned the world was actually round. Well I would say I just realized everything that I had been taught/thought about the history of the U.S. was dead wrong.

At Syracuse University, as a history major, I was taught that it was Roosevelt’s quarterbacking in the 30’s that helped the U.S. recovery from the depression. I was essentially taught, like the rest of us, that fiat monetary system created by the Federal Reserve was necessary to provide the economy the “flexibility” to soften the blows that were supposedly considered a natural occurrence of the market (this is painful to think about). If you are reading the blog, you probably have had the experience that I had when I discovered the plethora of readings that come from what is known as the “Austrian” school of economic thought. My first reading was Economic Policy: Thoughts for today and Tomorrow. From there it all just snowballed for me. Hayek, Hazlitt, Rothbard. But honestly it really only took me about the first 25 pages of that first Von Mises book and I was hooked. Like I had discovered a new religion and that I was saved….and then I immediately felt as if I had been robbed.

I thought to myself, “How could I not have heard of this school thought…I was a double major.” One would think that if you majored in both political science and history that I would have come across this “Austrian” school of thought. This just did not make sense.

What I do realize is that history is written by the victors. America came out of the WWII the strongest nation which had seemingly won WWII (no one really won, everyone lost in my opinion). We had amassed an enormous amount of wealth throughout the 19th and early 20th century. Subsequently although Roosevelt was in charge during the majority of America’s most prolonged down turn he and his “brain trust” are viewed as saviors.

What’s my point? I honestly believe that Mr. Obama and Mr. Bernanke are two of America’s best and brightest, however their current “humanactions” are a mold/consequence  of their life experiences. Obama happened to attend a college that teaches its students to believe that they know better than the collective. They believe can smooth out market upheaval with their policies rather than recognizing its their policy  their school of thought that caused the problems.   What if Mr. Bernanke was scientist that could have cured cancer but he was instead taught that cancer can’t be cured but merely slowed down and then at very end of his life he realizes he could have cured cancer all along but he was taught it can only be slowed down.

This is my glass have full post. I will try not to succomb to the idea (at least not tonight) that this mess came about because politicians and other self interested individuals were/are trying retain their power through inflation and wealth redistribution.

Wendall Wilkie Entrepreneurship, Federal Reserve, Free trade, General, History, Real Estate austrian, education, Federal Reserve, hayek, Hazlitt, syracuse university

Mises has a post today that is somewhat tangential to an article that my brother wrote on the blog a few weeks ago.  This gist of the article about a anti-free market conference recently held at Harvard.  The goal of the conference, as Woods appropriately puts it, “Why do people still think the interaction of free individuals is a superior economic system to one directed by Harvard Ph.D.s like us?”

I’d really like to know from all of these free market bashers, what free market they are talking about?  The one where government facilitate subprime mortgages, pushed interest rates artificially low, regultes so-called ratings agencies, and monopolizes currency production?

Teacherman General free market, harvard, mises

The Obama administration took steps over the weekend to reassure the Chinese government that its investment in US treasuries was sound.  The Chinese primier Wen Jiabao had shared his trepidation over the potential decline in the US dollar.  A former Chinese central bank advisor complained the administration’s reckless policies are eroding China’s investment in US treasuries.

We really have to stop and note the irony here.  We have a communist country chiding what is supposedly the world’s great bastion of capitalism on government spending.  Even more indicative of the situation is the clear power the Chinese government over this country, as the administration rushed to reassure the Chinese that all is well.  I doubt that China will dump its US treasuries en masse, but I think that this does signal that the credit gravy train for the US government may be coming to an end, let’s hope so anyway.  Admittedly, all signs up until now have pointed to the contrary as China has continued to gobble up treasuries in recent months.  There perhaps is some false hope that China’s reluctance to purchase US debt will keep government spending in check.  Ok, fine, keyword false.

Teacherman Government Spending, Inflation, Politics capitalism, china, communist, obama, treasuries

Jobs, Jobs, jobs politicians say. We must put the people back to work, however this is only temporary they say. Merely to fill the “gap” left by the private sector, but I would put this question to President Obama, whats your exit strategy? What jobs will the government provide that can be seamlessly absorbed by the public sector when the crisis is over?

Does the government have the foresight to train employees in area’s of business that the private sector will deem to be viable and productive in the future? Once the government builds their bridges and railroads where do the employees go from there? If the government can figure this all out maybe they can give me some stock tips while they are at it. I mean we all know how the government is a viable, efficient, and profitable entity that can balance a budget, so we will be ok, right?

Again, I don’t think that the government has an exit strategy for this mess. Once they start putting people to work it will be awfully hard (politically) to lay them off and let the private sector try to absorb them. These former government employees will not be trained in the skills they need to be useful in the private sector and they will continue to demand unsustainable wages. The government will succumb because ultimately these employees vote. This in turn will in turn increase the velocity of our country’s downward productivity spiral.

If the government wants to stimulate, I say pour money into mathmatics, science and law enforcment. Perhaps upgrade our rail system but thats it. Let prices come down, let banks fail, and watch productivity go up.

Wendall Wilkie Government Spending, Interventionism, Politics employment, government, jobs, obama, private sector, stimulus

On the Borderline, notes the sick twisted irony of President Barack Obama’s stem cell message earlier this week.

“Promoting science is about letting scientists like those here today do their jobs, free from manipulation or coercion, and listening to what they tell us, even when it’s inconvenient – especially when it’s inconvenient.”

Right, now clearly every Austrian is jumping up and down saying, “that’s it you buffoon … How can someone so intelligent be so incredibly obtuse!”

Of course, the Austrian point wouldn’t be to dump federal money into research institutions, but to allow the market to sort out our current economic troubles, even when it’s inconvenient.

As Hazlitt demonstrates, it is rather ‘inconvenient’ for the politician to perform economics appropriately.  For to do that, he must look not just at the immediate effects of his policy, but also the long term effects.  He must review not just how this policy will affect one group, but he must look at its effects on all groups.

If politicians were to do this, the answer would likely be quite ‘inconvenient.’  Much as it is, apparently, terribly inconvenient to apply one principle to multiple situations.

Teacherman Politics Hazlitt, obama, politicians, stem cell

In case you missed this classic story in the news yesterday, Secretary of Education is encouraging local school districts to spends the stiumlus money fast (emphasis added).

The Department of Education’s ‘five-page guidance’ manual actually says, “Spend funds quickly to save and create jobs…”

I was thinking of some more appropriate endings to that statement, here’s my top 5:

1) Spend funds quickly to ensure there is nothing left when the dollar becomes worthless.

2) Spend funds quickly before Congress realizes cuts in education spending actually may improve school efficiency.

3) Spend funds quickly to let China know that we are putting its money to good use.

4) Spend funds quickly so we can hurry up and get some more!  This is way better than actual budget balancing!

5) Spend funds quickly before people realize that more money doesn’t actually mean better schools.

Teacherman Government Spending, Interventionism, Politics arne duncan, budget, china, education, stimulus