This page has been archived and commenting is disabled.
Good is Bad, Bad is Good
From The Daily Capitalist
In George Orwell’s brilliant novel Nineteen Eighty-Four, one of the characters, Syme, in discussing the nature of Newspeak, says “It’s a beautiful thing, the destruction of words.” Newspeak was a systematic attempt by the dictators of Oceania, a totalitarian society eerily similar to North Korea, to control thought by eliminating words that gave rise to ideas they disapproved. What Syme and Orwell are talking about is that the destruction of words is the destruction of ideas.
There is a parallel to this in contemporary economic thought. Mainstream economists, Keynesians, Neo-Keynesians, and Neoclassists, would have you believe that what common sense would call “good” is now “bad.” Conversely, “bad” is the new “good.” I don’t mean to suggest that we are heading toward becoming a North Korea. My point is that that the experts seem to abandon common sense and yet most people instinctively understand that good is good.
Common sense is the crux of Austrian theory economics. Austrians look at how individuals act, not how "economies" or "nations" act or behave. Ludwig von Mises, the greatest Austrian thinker, and in my opinion the greatest economist, entitled his great work, Human Action (not National Action). The Austrian School was referred to by the Germans as the Psychological School because its analysis started with individual action and how those actions would either attain or fail to attain the goals sought by individuals. In other words, it involves a lot of the "common sense" that guides human behavior most of the time. It is comforting to know there is a philosophy of economics that conforms to what human being actually do rather than how some economist thinks we ought to behave.
Examples of economic Newspeak flourish, especially if you listen to President Obama’s economic team. My favorite example is the present conflict between consumer spending and consumer saving. Since the crash, consumers have cut back on spending and are increasing their savings. Most economists are saying this is bad for the economy; they urge us to spend, spend, spend to save the economy.
Actually, it is just the opposite: saving is the road to recovery.
It seems rather obvious that during a downturn of the economy it would be natural for people to save more and spend less. They are uncertain about their jobs, the values of their homes have plummeted (about 30% since the peak in 2006); their stocks have declined, and their debts are high. Isn’t it common sense that people are doing the rational thing by saving? This is something our parents and grandparents understood well.
Yet Keynesian economists, the dominant economic theory today, tell us that consumers should be spending rather than saving. “Don’t you realize,” they say, “that 70% of our economy is based on consumer spending. Why do you think we have all that unemployment? We won’t recover until we can get people to starting buying stuff again!” Since we aren’t spending they have got the government to do our spending for us. Paying one man to dig a hole and paying another man to fill it is, under Keynesian theory, the path to recovery.
According to their logic, we had the biggest financial bust in world history because consumers wrongfully just stopped spending. If that was the case, it’s funny we didn’t hear these guys warn us about too much consumer spending during the housing bubble.
To explain why saving is good and why economists are wrong, we have to ask why we keep having these boom-bust cycles. Here is where common sense really has been thrown out the window by mainstream economists. Almost all economists believe that you can make the economy prosper by printing huge amounts of new money and throwing it at the economy to make it grow.
Does it make sense that by printing more pieces of impressive looking green paper that you can create wealth? If that were the case, why aren’t the Zimbabweans the richest people on the planet? Yet, this is what economists believe and this is what the Fed practices.
To cut this short, this is exactly what the Fed did starting in 2001. Over a five-year period, the Fed reduced its Fed Funds rate from 6% to 1%. Money flooded the economy. Housing projects that made no sense but for the cheap money and the false appearance of paper prosperity, were hugely over produced. When the Fed stopped the gusher of money in 2006, the whole thing collapsed and pulled the economy down in the biggest bust the world has ever experienced.
Consumers, as we are referred to by economists, lost $10 trillion of wealth in the bust, and were left with huge debts from their wild spending. They borrowed against the value of their homes, they borrowed on their credit cards, and they borrowed to buy big new cars. Now about 25% of Americans have more debt on their homes than the homes are worth.
So what would you do in those circumstances? Spend more? I don’t think so. And that is why consumers are saving. Yes, it reduces consumer spending, but how else are we going to save when unemployment is high and wages are stagnant? Savers are making rational, informed choices and economists just can’t see that.
There are two major benefits from savings. You could say that reduced spending doesn’t boost the economy and it causes housing and other asset values to decline. But that ignores a critical point, and one that is hindering recovery: how else are you going to get rid of the homes and commercial real estate and that were overproduced during the fake boom? This really is simple economics: supply and demand. As prices fall, buyers will be attracted to the market, and gradually the excess disappears. The longer those assets and their related debts hang around, the longer this recession will last. This, I believe is the most critical issue in the economy right now: by letting the economy solve the problem of all these overproduced assets, credit will start flowing again.
Another critical benefit is that new savings builds up capital for future expansion. In addition to the $10 trillion lost by us consumers, the entire wealth of this country was reduced by maybe another $30 to $50 trillion (these numbers are hard to pin down). With all that capital wiped out, you may ask where the capital will come from to finance a revival of the economy once the dead wood is cleared away. We already know that it can’t be done by printing money. It can only be done by savings.
I say, “Thank you my fellow Americans for doing the right thing to help our economy recover. Please ignore the economists. Take care of yourselves and you’ll be taking care of the economy.” Good is good. Bad is bad.
»
- advertisements -
I've read Human Action and Power and Market.
Mises repeatedly insists that economic theory gives only qualitative, not quantitative laws, but then how can he write:
"Socialism is not a realizable system of society's economic organization because it lacks any method of economic calculation.." Human Action p.679
It is truely pathetic to believe that we are going to be capable of dealing with debt deleveraging of this magnitude by changing the monetary system. The debt overhang is there, do you at least understand the difference between AVOIDING a problem and DEALING with it when it's there? Rothbard's "The case Against the Fed" doesn't deal with this, but pretends it can avoid this mess, not how to deal with it.
You don't even seem to have understood what you have read.
No, actually, you don't understand what you "read". The economic calculation he speaks of is how individuals measure the value of a given good or service. You can't write an equation for that, because it relies on a self referencing algorithm (the human brain). But an individual can calculate the best use for their capital so long as they have a reliable method of measurement, ie sound money.
You certainly are a hostile little creature, aren't you? Is the failure of your method of thinking tearing your soul apart, such that you are focusing your anger on the solution?
This has nothing to do with what Mises writes:
"If no other objections could be raised to the socialist plans than that socialism will lower the standard of living of all or at least of the immense majority, it would be impossible for praxeology to pronounce a final judgment. Men would have to decide the issue between capitalism and socialism on the ground of judgments of value and of judgments of relevance. They would have to choose between the two systems as they choose between many others things... However, the true state of affairs is entirely different... Socialism is not a realizable system of society's economic organization because it lacks any method of economic calculation... Socialism cannot be realized because it is beyond human power to establish it as a social system."
If so, then how could he possibly know by economic theory alone that the negative effect of the lack of economic calculation would be severe enough to make socialism infeasible?
As to your ad hominem attack, I won't reply. It seems you libertarian ideologues can only refer to this kind of attack as you have no valid argument.
"If so, then how could he possibly know by economic theory alone that the negative effect of the lack of economic calculation would be severe enough to make socialism infeasible?"
Uhh... Logical deduction?
Also known as the critical element missing from monetarist economics.
If one person or group is in charge of the economy and they know the desires and resources of each and every person and corporation in the society (to the same extent that these agents know their desires and resources themselves) then yes, socialism is feasible. Obviously, such a task is absurdly impossibly difficult and thus we can logically deduce that socialism is absurdly, impossibly difficult to pull off with any degree of efficiency.
Given that Bernanke, "the world's smartest man", was entirely unaware of a housing bubble or impending economic doom months before collapse, we can further deduce that such individuals could not possibly manage an economic instrument remotely as powerful as the interest rate.
The economic calculation argument shows obviously that Mises has underlying quantitative assumptions in spite of his strictures against them.
Not arguing that Mises' assumptions about the impossibility of socialism are wrong, but against his notions that economics cannot make quantitative pronouncements.
Of course it does, as with any theorization methods. But that doesn't imply that using quantitative data is useful. In fact, econometrics is just about as useless as a discipline can be. Every single "conclusion" that can be made using econometrics can be interpreted in many ways, thanks to the endogenous nature of economic systems. There are no exogenous variables and there can be no experimentation to determine cause and effect.
"...econometrics is just about as useless as a discipline can be." This is as useless of a statement as there can be; A statement of pure ignorance. A statistical model is a model of interpretation, not explanation. There is a big difference. Explanations are for the economic theorists, not the econometrician or the statistician. This leads to another point. The whole notion of "equilibrium economics" is utter bullshit. There really is no such thing as equilibriums in economics, it purely a mathematical ASSUMPTION so that economists can masturbate with mathematics and look smart. This is fact is amply demonstrated via good statistical models which show that reality is far different from the proposed theory. Just ask Bernard Madoff about Harry Markopolos.
If economic data isn't useful how do you know we've got a big mess on our hands? No, looking around in your neighborhood is no valid method of asserting the severity of the situation as you can never be sure that your neighborhood is representative of a wider situation. For that you need economic data.
The way Austrians deal with it is simple.
The Fed ceases to exist and interest rates are determined by demand and supply of loanable funds.
Since there is lower supply of credit than what the Fed forces the supply to be through interest rate targetting, the interest rate rises.
The firms and consumption at the margin (i.e. the processes that could only be sustained due to artificially low interest rates) are halted. Unproductive sectors (i.e. banking sector, export sectors, manufacturing, etc) goes bankrupt and assets are liquidated and sold to investors for pennies on the dollar.
Such a debt-destruction and deflation process results in many job losses at the outset, but since capital is freed up from unproductive sectors (those that needed to be subsidized by Fed intervention, i.e. inflation tax), it is reinvested (at higher interest rates and therefore higher expected return on capital) in firms and consumption that is actually sustainable and actually produces things that are valued enough by society to not have to be subsidized in the first place. Jobs are created and peoples' meagre savings are maintained. A small army's worth of Wall Street professionals and lawyers that thrived off of Fed intervention and regulation are reinvested into sectors that actually produce wealth (i.e. medicine or engineering).
The Keynesian alternative is to prop up the current structure of production with money printing, sparing the job losses for a while but at the expense of creating a system that actually generates wealth and uses scarce resources effectively.
If you were truly afraid for the unemployed, you would advocate the Austrian method (for its long term growth ideology) combined with short-term relief for the unemployed (i.e. money printing to make sure that the poor are not completely trampled).
As I said, as Austrians cannot deal with any quantitative forecast of the debt destruction and deflation process, they assume that social cohesion will be fine and ignore the unintended consequences of such laissez-faire policy, ie civil war or revolution that will result in utter chaos.
Again, you are simply repeating the Austrian prescription is "let it crash", all will be fine afterwards.
btw, I'm not advocating for the keynesian alternative so please stop refering to it.
Well I'm not advocating for the Austrian prescription entirely. Obviously the best method is Austrian combined with social supports for the necessities of life. But controlling economic levers through debt-guarantees, en masse asset purchases, interest rate policy, burdensome regulation and bailouts for the banking sector without changes in the way bonuses work are all clearly non-optimal and only benefiting the entrenched and inefficient corporations and crony networks of America.
Now we're talking...
I agree with you.
Quite frankly as I get no say in what the smart people in charge do and have no illusions that they will do the right things ever. I am content to have a road map that tells me how to navigate the treacherous roads ahead. The Austrians have a good track record of this. I will leave it to others to fix the world.
Just explain what kind of roadmap Austrians propose?
I'll explain it for you : let the economy collapse, let unemployed people and the hundred million new poor people starve, then let's have a civil war between tea baggers and progressives or better a revolution that will kill half the population... That's what they call "creative destruction". Then the economy will grow again.
Yeah, great roadmap. Oh, and what "track record" do Austrians have? You must be joking. They have absolutely ZERO track record as politicians have thankfully never ever followed their advice.
I guess you never heard of the Depression of 1920. There is a reason for that.
The government followed the Austrian prescription to a "T", ie, they did NOTHING and the depression was over in less than 6 months.
But hey, if you want to put your ego (by "helping" all those poor, starving people by stealing from those evil "rich" people) in front of the actual economic well being of people, be my guest.
The 1800s in America, outside of the Civil War is their track record, right up until 1913.
You must be an ignorant neoclassical economist if you compare our situation today to that of 1920.
Here's a graph for you to ponder :
total debt / GDP
http://www.comstockfunds.com/files/NLPP00000\292.pdf
In 1920 total debt/GDP was 170%. It's now more than 330%.
I guess you don't understand what a debt deleveraging crisis means.
Oh and Austrian Economics didn't exist in the 19th century, so as I said their track record is inexistent.
OK
Find one Austrian that favors civil war, violent revolution, and economic collapse
I'm waiting
Not saying they favor it. But they ignore the unintended consequences of what they propose, ie let the economy collapse hard and fast.
It was government intervention and bubble blowing that put us in a position where an economic collapse is inevitable. The Austrians opposed these developments every steps of the way. The inevitable failure of Gramm-Leach-Billings and the housing bubble were announced years in advance by Ron Paul. It's public record.
That's your Austrian road map. You'll do yourself a favor if you study it closely and ask for directions should you become disoriented.
The road map is how to protect yourself personally from what the governments is doing and nothing more. A map is about where we are going not about changing the road. In an ideal world no bad crap would happen. In the real world it does. You can either except that you can't personally change it and adapt and prepare or not.
you mean protecting yourself by fleeing to the country side and storing canned foods and ammos? I don't need Austrian economists to help me with this...
"Let it crash", that's all they can say. If you were on a plane of which the engines weren't working, I don't think you'd be too happy if that were the only thing the pilote was saying... I'd rather have a pilote who was preoccupied by how to save as many people as possible than one who kept saying "let the plane crash hard and fast so we can get done with it".
It was not the Austrians that got us where we are today. It was the same people who are in charge today. If you now want to trust the same people that have screwed up as badly as they have to fix what they broke that is up to you. However a little math will tell you that it is now beyond fixing without pain. At best they can delay this for a few years. If you don't know how to protect your assets and adapt you will be a victim of the fixers.
Using your analogy. Austrian economics would be a parachute. It won't save everyone but it might save you and your family.
No, Austrian economics is no parachute. They just pretend they could have avoided the crisis but have no clue how to deal with it.
Indeed, Austrian Economics didn't get us in this mess. Nobody has ever followed their advice so it's clear it's not their fault. But why do you trust them when they have no track record to speak of? THEY HAVE NOTHING TO SAY ABOUT HOW TO DEAL WITH THIS MESS. Do you understand the difference?
No, I don't trust those who got us into this mess, central bankers, Milton Friedman and his accolytes...
If you are so well versed on Austrian Economics, just let me know how they propose to deal with this debt deflationary crisis.
As you are versed in Austrian economics I am sure you are aware of what Mises called the Crack-up boom.
"'This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.'
"But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
Thus you know the Austrians are saying it is too late to avoid. They would not have let it happen in the first place. Don't shoot the messenger.
This is where we are today. The government can continue with the QE programs and ultimately destroy the currency (hyperinflation) or they can eventually stop and let the economy re-balance so that incomes and asset prices align with each other (the deflationary outcome).
You can debate economic theory about other solutions all you want but the Keynesian's are in charge and nothing is going to change that. For political reasons they will continue with the QE programs and this will eventually have the predictable result.
As Keynes said - In the long run we are all dead (he did see this coming).
http://www.youtube.com/watch?v=czcUmnsprQI
see my reply to tmosley just below...
To assume that "the problem (ie the enormity of the debt bubble) will simply go away if governments stop intervening" is truely pathetic.
There was no enormous debt bubble in 1920. No wonder the problem went away while Wilson had his semi-debilitating strokes... There was no problem to begin with.
If that's all the evidence you've got for the wonderful track record of Austrian laissez-faire policies, then it's not worth anything.
As opposed to the ongoing social disruptions that we endure because of these kinds of dedefunct, imaginary models?
Minsky's model is not defunct nor imaginary...
Go and study it, rather than assume what you ignore.
Austrians and their laissez-faire ideology will only bring complete misery and economic ruin.
The kind of social disruption this bankrupt Ausrian ideology will bring will be million times worse than what we endure today : complete chaos that will result from the kind of revolutions endured by the French and the Russians centuries ago.
Then why are the biggest depressions when the government interferes the most? The depression of 1920-1921 was worse than the great depression in terms of the decline of wholesale prices. The government not only did nothing, it cut its size, and America was back on its feet in 1 year. Previous recessions (often caused by war) also healed themselves.
Austrians rarely understand the potential of human creativity and its price
Hundreds of them were yelling similar rants in 1994 when the deficits were ~2 trillion
But there was internet Boom followed by huge capital creation and prosperity everywhere for next 15 years
If they can do it once they can do it again
Maybe they have contingency plans for later but right now there are very few blackswans out there
in other words, let it crash louder, lunar and later
Yes, the current methods turn the world upside down.
"A penny saved is a penny earned" is no longer true because inflation will eat away at that saved penny. "Neither a borrower nor a lender be" is made impossible because one must by stocks or bonds (lend) in an effort to earn interest and overcome the inflation rate.
+100
There is difference between normal growth and cancerous growth
Right now the cancer is growing .... faster and faster
Corporations are celebrating this.. but Individuals are dying... a slow painful death!
Like you never heard of gold or silver ?
The only one that will really hold its value.
http://cityroom.blogs.nytimes.com/2009/11/04/maker-learns-the-fate-of-a-...
If this goes on then the Fed will have to implement a nominal negative rate. I.e. take our money and we will pay you on it, just spend for chrissakes.
Are you sure about not heading towards North Korea? All hail Kim Il-Obama!!!
It is all good...
It is all good...
except for the bad stuff
Looks like overnight the BRIC's and their expected increased internal consumption is driving this.
WAR IS PEACE
FREEDOM IS SLAVERY
IGNORANCE IS STRENGTH.
Sound like Peter Schiff.
Doubleplusgood.