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 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
A great article posted in WSJ by Bob Gelfond, brought to me by Cafe Hayek briefly lays suggests that the governments influence over the money supply can have a disastrous role. The problem is that he failed to incorporate some very important terminology from Austrian Business Cycle Thoery: malinvestment.
Us Austrians need to point people to fact that malinvestment is the single most destructive product of fiat currencies.
Recently I went to a panel discussion that included UBS’s Art Cashin. He described how Y2K’s money expansion helped lead to a bubble: the run up in tech stocks at the turn of the century and later a housing boom. As we know such investments cost many investors dearly. What Cashin was describing was a classic case of malinvestment, however he, as well as the other panelists, coined such scenario’s as bubbles. I wish we could somehow get prominant speakers to use ABCT terminology such as malinvestment instead of terms like “bubbles” to draw people into reading more Von Mises literature. The literature so compelling I feel it would be hard not to grow are ranks exponentially in the near future.
MisesBeliever Federal Reserve Bob Gelfound, Cafe Hayek, money supply
In 1819 the Second Bank of the United States was a lightning rod issue in many states. The bank was in shambles, as was the American economy. Take a look at the following argument from McCulloch v. Maryland, we get the following oral argument from Walter Jones. The Constitution did
not imply the power of establishing a great banking corporation, branching out into every district of the country, and inundating it with a flood of paper money. To derive such tremendous authority from implication would be to change the subordinate into fundamental powers; to make the implied powers greater than those which are expressly granted; and to change the whole scheme and theory of government.
Of course this logic was rejected, sound familiar though? Some may not understand the tremendous power grab Supreme Court Justice John Marshall took on behalf of the federal government when repudiating the above sentiment. His sweeping opinion codified the implied powers clause as a broad offering of power to the federal government. A tragic, if inevitable, day in American history.
Teacherman Federal Reserve, History bank of the united states, john marshall, mcculloch v maryland, walter jones
From 1987 up until the end of Greenspan’s rein in 2006, there was a period of easy money and what Barry Ritholtz called “ultra easy money” which was created by Greenspan flooding the market with easy cash.
Ritholtz points out that yet another ingredient to the crisis pie might have been that there were too few banks and too many giants. You had super mergers in which smaller banks were snatched by the larger banks. One argument is that banking should be done on smaller scale. A scale where the bank manager as a more personal relationship with person he is lending to.
The principal of banking has always been the same throughout history, borrow money cheaply (deposits) and lend it out to someone who will pay as much interest as possible. What we saw develop through the use of technology was a man (or computer software) lend money to man in on Long Island to buy his house without personally verifying the financial standing of the borrower.
Sweet plan, right? The lender is now executive somewhere else and the taxpayer is left holding the ball, the proverbial “Moral Hazard” at its best.
The easy money policy that allowed for super mergers to occur is another example of how Federal Reserve policies often limits competition and encourages malinvestment.
MisesBeliever Federal Reserve, Real Estate banking, barry ritholz, Federal Reserve, greenspan, moral hazard, taxpayer
Will U.K. lose there AAA rating? Will the U.S. lose its AAA rating? Will the FED take a hint from the market? Will Obama and his Dems and the spend happy Republican pals get the point? Not likely.
Is this the start of what Teacherman was talking about?
MisesBeliever Federal Reserve aaa rating, fed, obama
Jack Welsh’s on the Economy: Past the Point of No Return title describes how I have thought about monetary policy after I picked up on the Austrian Business Cycle Theory (his piece is a must read). We have gotten so out of control with credit expansion, by every measure, that I fear the consequences of unwinding it. Again, think of the last pargraph of chapter 23 of Hazlitt’s Economics in One Lesson.
“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.”
MisesBeliever Federal Reserve business cycle, credit, economics in one lesson, Hazlitt, monetary policy
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
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