The Brothers Austrian

Admittedly I am a little soft when it comes to econometrics (what essentially is seen as modern economics), OK EXTREMELY SOFT… but as a history major I am extremely drawn to the data. Data is statistical history and nothing more as Von Mises illustrated (Human Action: Prices XVI). Traders, economists, and the Fed unlike seem to have skipped this chapter in Human Action.

What is most important is what is driving forces behind the data. Modern day economists are drawn to the data without taking into account the human factors that provided them with the numbers, without evaluating the history properly. As a history major I am trained to look at human intentions; the why and how’s that can help us understand where the data came from. Data is nothing more then statistical history and nothing more. What is most important is what is driving forces behind the data, aka the HUMAN ACTION.

Let me get right to the point.

I think it would behoove money managers to look back at the history of , prices and focus on the praxeological reasons as to how and why the prices were driven to given level. When discussing the recent 3.5% so called recession ending GDP number Peter Schiff pointed out:

During the decade that corresponds to the Great Depression, annual GNP expanded for six years and contracted for four. After nose-diving in the early years of the decade, GNP turned positive in 1934 and then logged three more years of solid growth (the four year average annual growth rate was 8.5%). But does anyone really believe the Great Depression ended in 1934, when the economy first stopped contracting? Unemployment reached 19% in 1938, nearly the peak of the entire Depression, almost a full decade after the stock market crashed! Why will we be so much luckier this time around?

Currently U3 unemployment is at 9.7% and U6 is at 17%. Now some say that U6 measure is most like the Great Depression 1938 as unemployment was calculated much differently at the time and suggest that is functional equivalent of the methodology that was used in the 1930’s.   According to N. Andrews such suggestions may be factually incorrect. Current U3 measures are actually most like 1930  (a year after the 1929 collapse in which the estimated U3 spike from 5 to 10%…sound familiar?).

Unemployment is at 9.7% or 17% to depending on how you look at it. Helicopter Ben says that he won’t REPEAT the mistakes that Japan made and send this country into a deflationary spiral. Obama is not going to take his foot off the money producing accelerator like the Japanese did briefly in 1998 sending the Nikkei into a tailspin (the proverbial Dump Japan Era). But let me leave you with this, where did the money printing philosophy get Japan? Hint

I keep hearing about a V-Shape recovery, perhaps this nothing more then government induced drunken zig zag.

The Street seems to believe that the Fed can control the situation and will pull the liquidity from the system. But how can we let interest rates rise politically? Rising interest equals more defaults and more homeless Americans. Eventually we will forced take our medicine and you will get deflation, but it won’t in terms of dollars.

Actually come to think of it, some day I will wall paper my man den using dollar’s, that way all that expensive paper doesn’t go to waste.

Oh yeah, so what has history shown is the cards for this money manager: rise in gold prices, increasing hostility finger pointing, and dare a say warfare? God, I hope not.

Wendall Wilkie History, Uncategorized history majors, money managers, Peter Schiff, The Great Depression

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

I was perusing the internet this morning while simultaneously watching a History Channel episode called The Black Blizzard which chronicles what life was like during the 1930s Dust Bowl.  I decided to find out more about this tragedy.

Supposedly the book to read on the subject is called “The Worst Hard Time” by Tim Egan for those that are interested (disclaimer: I have not read the book), however the documentary was narrated by Egan and it would seem he has harvested some solid facts.

As the History Channel started to draw more of my attention, my Austrian wheels began turn: How did the Dust Bowl came about? How did the Midwest become over cultivated? Why did so many people move to Western Kansas to farm? In the The Worst Hard Time Egan writes:

“Why did families settle in the and western half of the Great Plains–land described as ‘the flattest, driest, most wind-raked, least-arable part of the United States?’ The government and the media of the day undoubtedly played major roles in “selling” the land to unsuspecting settlers. Congress encouraged settlement of “the last frontier in public domain” and, in 1909, passed the Homestead Act, a desperate move offering inexpensive land and attractive incentives for settlement. Newspaper editors, bankers, politicians, and speculators distributed fliers, broadsides, and brochures advertising ‘the most alluring body of unoccupied land’ in the country, and the government termed it ‘the last frontier of agriculture’ Brochures described areas with paved, tree-lined streets, clean water, and railroads but, when the settlers arrived, they found only stakes in buffalo grass.”

Hmmm, the Homestead Act, sounds like another populist undertaking, where did this legislation originate and what’s it all about?

The Homestead Act of 1862 was passed by the U.S. Congress. It provided for the transfer of 160 acres (65 hectares) of unoccupied public land to each homesteader on payment of a nominal fee after five years of residence; land could also be acquired after six months of residence at $1.25 an acre. The government had previously sold land to settlers in the West for revenue. As the West became politically stronger, however, settlers increased pressure on Congress to guarantee free land. Several bills providing for free distribution of land were defeated in Congress; in 1860 a bill was passed in Congress but was vetoed by President Buchanan. With the ascendancy of the Republican party (which had committed itself to homestead legislation) and with the secession of the South (which had opposed free distribution of land), the Homestead Act, sponsored by Galusha A. Grow, became law.

This is what I would call one of Hazlitt’s half truths. In the short term the Homestead Act seemed like a great undertaking: revenues for the government and land for the people to farm, but what were the long term affects of the government providing land to the people for essentially nothing? What were the “whole truths” of the government legislation? One might ask, “How could they have possibly known what the “whole truth” was going to be? But that’s just it, no man, no group, no human….no government can provide us with whole truths. No one person can have that kind of foresight and that’s why doing nothing may be better than doing something. But then again doing nothing is not what gets you elected.

Wendall Wilkie History, Interventionism black blizzard, dust bowl, half truths, Hazlitt, history channel, homestead act, tim egan, wheat

As I prepared for my lesson on the Great Depression this semester, I turned to our textbook and read the following (this is not a joke):

“Why did the country sink further into depression [after the stock market crash]?  Farmers and coal workers had suffered all through the 1920s from low prices, and the farmers were the first group in the 1930s to plunge into depression.  But other economic sectors also lurched out of balance.  Two percent of the population received about 28 percent of the national income, but the lower 60 percent got only 24 percent.  Businesses increased profits while holding down wages and the prices of raw materials.  This pattern depressed purchasing power.  Workers, like farmers, did not have the money to buy the goods they helped to produce.”

Hmmm.  After dismissing plans to systemically remove this section from the textbook of every student, I put together a very brief overview of the Austrian business cycle and presented this version to the students as my lecture on the subject.

As juniors in high school, most of my students are economic novices.  That is to say, both explanations were drawn onto a tabula rasa.  The overwhelming comment from my classes centered on two stark realities: 1) “we’ve already discussed similar economic downturns previously and this one sounded very similar” (ergo why didn’t we learn); 2) “this sounds a lot like toda” (ergo why didn’t we learn).  Ironically, Mises had a daily article yesterday about the economic downturn in 1819, following a similar theme.

Generally, the Austrian theory appealed to most students.  As we move into the New Deal, most students will struggle with the idea that the government cannot be a savior.  As our textbook will trump the various New Deal program up, I will balance it with Hazlitt’s first chapter (the lesson).

Teacherman History austrian theory, business cycle, great depression, Hazlitt, new deal

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

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. “Thomas Jefferson: 3rd president of US (1743 – 1826)

Wendall Wilkie History, Interventionism, Uncategorized banking, danger, Thomas Jefferson

I’m currently teaching President McKinley in class.  You probably know the story of McKinley and Bryan in the elections of 1896 and 1900.  I have to admit, I was somewhat disappointed to see McKinley end up at #16 on the recent survey of presidential leadership.  Not that I put much stock in this type of survey, but to see McKinley below the likes of Monroe and Polk is a tad aggravating.

I cannot say I am a total fan of McKinley politically, after all, it was in his name that the country got its all-time high protective tariff in 1890 (not to mention his later bellicosity).  The McKinley Tariff set the taxation rate on imports at a whopping 48.4%.  The insanity of such an idea bore itself out in the resulting Panic of 1893.  But after bargaining away a strict gold standard to get the tariff passed, the republican bore down on the hard money standard for the Election of 1896.  I must admit, though, that even as a congressman McKinley was not an ardent goldbug.  He voted twice for Bland Free Coinage and even put forth an platform at the 1888 Republican convention that supported both gold and silver coinage.  But in the end, when it came down to defending hard money against the bombastic William Jennings Bryan, McKinley passes muster. If we can fault McKinley for all of the above, we must recognize the importance of shunning silver in 1896.  In the midst of the ‘long depression’, diving into silver would have caused catastrophic economic problems.

But back to the survey, for me, McKinley is just one of those presidents that you pull for subjectively.  His policies were pretty flawed, but this was a good man.  A man with no extrodinary skill.  A man who lost his only two daughters before the age of five.  A man would patiently cared for his sick wife.  A man who, according to one historian, never sought political promotion in a ‘Machevellian’ manner.  A man who, as governor, paid out of his own pocket for a railroad car of food for the destitute.  A man who then spearheaded, not the largest public spending campaign, but charity drives to feed and cloth more than 10,000 people.

Teacherman Gold, History election of 1896, free coinage, Gold, mckinley tariff, panic of 1893, president, silver, william jennings bryan, william mckinley