Mises: The Man Who Predicted the Depression

Econophile's picture

By Jeff Harding
The Daily Capitalist

I've been meaning to write a piece on Ludwig von Mises, the greatest economist who ever lived, and, if you will, a hero of mine. This is a piece from the Op-Ed page of the Wall Street Journal by Mark Spitznagel. Spitznagel is the head of Universa Investments and is a protege and partner of Nassim Taleb of Black Swan fame. Those of you who have been following my blog know of my admiration of Mr. Taleb. He and Mr. Spitznagel were also "right," and Universa made a lot of money for their investors from our economic crisis.

Mises had as big a brain as you can get, and, in the social sciences field, he is the equivalent of Albert Einstein. His masterpiece, Human Action, was the summation of his ideas and philosophy. To explain his ideas would take some time. The thing is, it's difficult stuff. But, to use an analogy, he created a "unified field theory" equivalent for the social sciences. That is, he started with the basics, epistemology (the science of who you know what you know) and worked up from there, and created a complete explanation of human action, especially as an economic being.

His scholarship is peerless, his ideas are timeless, and, as Spitznagel puts it, he was "right." And still is. I don't mean to be hagiographic here, but he's that important of a scholar. I actually met Mises and his wife just before he died. I recall bringing my copy of Human Action along, but I was too shy to actually ask him to autograph it, although he and his wife were very gracious.

For those who wish to know more about Mises, there is plenty of information at the Mises Institute. I highly recommend his biography, Mises: The Last Knight of Liberalism, a massive work but is virtually a history of economics.

The Man Who Predicted the Depression

Ludwig von Mises explained how government-induced credit expansions led to imbalances in the economy.



Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

Mises's ideas on business cycles were spelled out in his 1912 tome "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit"). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that.


Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.


Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.


Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.


The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.


"Theorie des Geldes" did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it."


We all know what happened next. Pretty much right out of Mises's script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises's logic, was this a failure of capitalism, or a failure of hubris?


Mises's solution follows logically from his warnings. You can't fix what's broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don't encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail—no bailouts. (You see where I'm going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.


Mises started getting some much-deserved respect once "Theorie des Geldes" was finally published in English in 1934. It is unfortunate that it required such a disaster for people to take heed of what was the one predictive, scholarly explanation of what was happening.


But then, just Mises's bad luck, along came John Maynard Keynes's tome "The General Theory of Employment, Interest and Money" in 1936. Keynes was dapper, fresh and sophisticated. He even wrote in English! And the guy had chutzpah, fearlessly fighting the battle against unemployment by running the currency printing press and draining the government's coffers.


He was the anti-Mises. So what if Keynes had lost his shirt in the stock-market crash. His book was peppered with fancy math (even Greek letters) and that meant rigor, modernity. To add insult to injury, Mises wasn't even refuted by Keynes and his ilk. He was ignored.


Fast forward 70-some years, during which we saw Keynesianism's repeated disappointments, the end of the gold standard, persistent inflation with intermittent inflationary recessions and banking crises, culminating in Alan Greenspan's "Great Moderation" and a subsequent catastrophic collapse in housing and banking. Where do we find ourselves? At a point of profound insight gained through economic logic, trial and error, and objective empiricism? Or right back where we started?


With interest rates at zero, monetary engines humming as never before, and a self-proclaimed Keynesian government, we are back again embracing the brave new era of government-sponsored prosperity and debt. And, more than ever, the system is piling uncertainties on top of uncertainties, turning an otherwise resilient economy into a brittle one.


How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale?


Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments LP, based in Santa Monica, Calif.

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Anonymous's picture

1) Don't want to spoil any hagiography here but, did anyone else think this article SUCKED? I *tried* to read it but ended up tossing it in an MTA bin. The author just can't write. He named names (to his credit), and then just kept naming names, their backgrounds, etc., never explaining what they did and why it was relevant. Or if he did (I missed it) he did so in 2-3 paras, after 30 of... just stuff. So after 30 mins I still have little idea about what his point was, except that he hates progressives. -Maybe that's his first problem: he stated an opinion - not to be confused with a conclusion - before stating his case.

2) WITHOUT GETTING INTO THE PROS OR CONS OF THE CENTRAL BANK (at a minimum I'd like to see an audit and greater accountability, the latter not being incompatible with "independence") I'd like to see some more revealing data about this supposed decline in the purchasing power of the dollar since establishment of the Fed (as all these anti Fed types say the Fed has been so bad for our currency). The USD is the only major currency that has not encountered hyper inflation in the last 200 years, let alone the last 100. Yet the Fed's been sooo bad for the dollar... I remain open to the argument, just more info please... Tell me how the USD has declined on a PPP basis compared to... other currencies, for example...

Anonymous's picture

Please don't compare even the brightest of economists to real scientists. They're all merely high priests of their respective economic sects.

There's nothing scientific about pulling shit out of your ass, with no conclusive evidence to confirm your hypothesis, and then proclaiming that you have the answers.

Economists are a large part of the reason that real scientists encounter so much resistance when they actually have solid results to present to the public. People who don't know any better can't distinguish between opinions (which is about all that economists have), and actual empirical facts, which is generally what hard scientists have before they start running their mouths in public.

If economists were really that brilliant, they'd have taken up real science, where you can actually test out theories, and produce something of value if they're confirmed.

Anonymous's picture

Keynes vs. von Mises

Short term vs Long term economics

phaesed's picture

Oh please, Mises was nothing compared to Hayek in my opinion, and Hayek pales in comparison to W.S. Jevons, Augustine Cournot and Leon Walras. In fact, Wicksell was far superior in behavioral understanding as well. Then you have John Hicks who actually theorized the idea of a liquidity trap in the IS-LM debate. Do your homework, Economics did not begin in 1900.

perfectlyGoodWhiteBoy's picture

I remember my Gen Eq professor commenting on Walras. 

"Be the first to make a trivial observation and get a law named after you."

phaesed's picture

Lol have you read your way through Walras or Cournot? You wouldn't be saying that.


And I didn't mean do your homework, I meant keep doing your homework, sorry.... Seriously though, Austrian economic theory is useless if it cannot integrate with business accounting theory.

I mean wtf, how the hell can we measure shit if we can't use numbers? Personally, that sounds like the ideal set up for the banks, one weak system and the other entirely useless except for people to bitch and point to. God, why does everyone who reads a bit of Austrian theory claim they know everything so fast... oh that's right... because it's subjective and lacks practical application. Hard to argue with someone who can't prove themselves right or wrong. Don't get me wrong, Bohm-Bwaerk, Menger, and Hayek are titans.... Mises and Rothbard? Sorry, they take back seat.

Anonymous's picture

"Austrian economic theory is useless if it cannot integrate with business accounting theory"

I'm not going to jump on the Misean bandwagon now simply because those who share my views on what the government is doing have done so. However, I would like to observe that the facility to integrate with other theories is not meaningful if the end result is rubbish. Having sat through numerous lectures where econometrics professors demonstrate their math envy I'm reluctant to believe in anything simply because of their "math."

Nonetheless, I have to withhold judgement of all the economists discussed until I've had time wade through their turgid prose.

ToNYC's picture

Fair is rare and the free market don't care what you can manage to wrap the logical bent of your neo-cortex around...and Mickey Mantle don't care if your father gets a paycheck, C!

Anonymous's picture

this is an interesting coincidence as i have just come across this article after watching a lecture on Hayek, i believe he learnt from and improved upon the work of Mises.

Anyhow i have been trying to come to terms with the economic world we live in today and to reconcile it with social justice and morality. im trying to convince myself that what is occurring today is somehow right and not a criminal conspiracy.

i was thinking about Hayek (and possibly Mises) when he stated that markets cannot be made to reward intellectual merit, but rather only things that are of benefit to society, eg footballers do not deserve millions of dollars but because they provide happiness to huge tracts of society's sports fans their pay packets are thus justified.

or for another example, two people who have exactly the same merit in terms of educational qualifications, but one comes up with an idea that benefits society and thus becomes fabulously more wealthy than his peer who is no less educated or meritable, yet has to live on a paltry salary.

the point i am making is that markets are unjust indeed, but in a way, perhaps this unjustness is the cause of a much better justness, that is, the improvement of society. i Mean yes the bankers may screw the people and have to be bailed out by the tax payer, but in the end, would it be really better in terms of society if all of us got to keep our individual portions of tax dollars that have gone to the bankers. I mean we would just spend this money selfishly on personal material goods anyway.

My question to you is thus, is the money in better hands with individual people who will spend selfishly on big ticket imports, or are all those little individual sums more productive as a huge collective sum in the hands of experts and bankers? who although greedy filthy immoral, pigs that will also spend selfishly, are much more cunning and knowledgeable and able to make that money more productive for society.

yes the banks should have, and deserved to collapse, yet the taxpayer bailouts although making tax payers a little poorer, have thus protected them from a much worse fate.

So while i bitch and whinge that the economic system is unfair, and that intellectuals deserve more money than meathead footballers, and that CEO's and investment bankers are sickeningly overpaid, and that speculation is an immoral and dangerous way to redistribute wealth; would society really be better if this money was distributed more equally?, i said equally (not equitably). Is fraud even such a bad thing if it results in the more efficient use of money? Ultimately can a market economy and social moral justice be reconciled?

Dantzler's picture

I like to pay for value and I don't watch football.

Remove the distortions from the economy and let every one's money find value. Curruption breeds unfairness - bring on the meritocracy!

Anonymous's picture

how do i just know you are a moron?

ToNYC's picture

Let me count the ways! I remember Hank Paulson was going to get it done if the market knew that he had a "bazooka" in his pocket. Congress slept tight knowing the Tooth Fairy and the Easter Bunny were coming for breakfast.

Anonymous's picture

read Minsky - He saw the ponzi element to the whole lending set-up that brings on the instability that we have seen in this latest crisis

ft65's picture

Great article and comments, but it still concentrates on modern money, banking and finance - none of which is real, but a clever Ponzi scheme. It build our modern (now collapsing) society, which was a fun ride for a few, even for all those (like us) hanging on to their coat tails.

In Austrian Economics money is basically considered a temporary loan for human labour (labor) in the past, (lender) or future labour (debtor). If debtors are defaulting (on their promise of time), then future labour side of the contract vanishes. When enough promises of future labour are defaulted on, the system is broken, it is that simple. Our kids are not going to be enslaved by their parents system of (unpaid) usury (even if they had the work ethic).

The trouble is, it is a choice of steep decline in an orderly fashion as is possible, or chaos. With 6 billion people to feed, clothe, and shelter, chaos equals genocide. With 6 billion, genocide is going to be very messy, nature is going to reap her revenge on us! But go ahead, keep jiggling those numbers, and pointing fingers at those people who lead us (kicking and screaming) down the Primrose Path.

Anonymous's picture

Great article and comments, but it still concentrates on modern money, banking and finance - none of which is real, but a clever Ponzi scheme. It build our modern (now collapsing) society, which was a fun ride for a few, even for all those (like us) hanging on to their coat tails.

In Austrian Economics money is basically considered a temporary loan for human labour (labor) in the past (lender) or future (debtor). If debtors are defaulting, then future labour side of the contract vanishes. When enough promises of future labour are defaulted on, the system is broken, it is that simple. Our kids are not going to enslaved by this system of usury (even if they had the work ethic).

The trouble is, it is a choice of steep decline in an orderly fashion as is possible, or chaos. With 6 billion people to feed, clothe, and shelter, chaos equals genocide. With 6 billion, genocide is going to be very messy, nature is going to reap her revenge on us!

But go ahead, keep jiggling those numbers, and pointing fingers at those people who lead us, (kicking and screaming) up this Primrose Path.

Hephasteus's picture

When your creating a fuck up. You always marginalize the people who see it first. It's really easy to do on the first few people. Then it gets harder and harder as evidence mounts and the old quotes and writings come out. The first warners are all treated like chicken little, the next wave are treated with a bit of healthy skepticism and then when it becomes likely they are finally respected.

Brett in Manhattan's picture
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
Arthur Schopenhauer
gossamer's picture

Ron Paul is a disciple of Mises economic philosophy.   In fact I believe that Congressman Paul is the President of Ludwig Von Mises Economic Institute.

We at least have one congressman who understands sound money principles.  

Anonymous's picture

Lew Rockwell, ron Paul's congressional chief of staff nearly 2 decades, is the president of Mises institute.

nemome's picture

The problem with mises is his philosophy does not square with big government.  Keynes gives them power.  They will never give that up.

Slewburger's picture

"We will not have any more crashes in our time."
- John Maynard Keynes in 1927

Keynes vs. Mises:

When politicians are given the choice its like asking a kid if they want a sparkler or a cherry bomb.

Rusty_Shackleford's picture


Well said.

Anything that requires them to acknowledge that A=A will be fought relentlessly.


Anonymous's picture

von Mises was a genius. And a persistent one.

Read "Money, Bank Credit, and Economic Cycles" by Jesus Huerta de Soto.

If you ever wanted a clean, crystal clear, absolutely spot-on understanding of money and fractional reserve banking, derived from Misesian principles, this is it.

One of the 10 best books ever written.

Anonymous's picture

I read Human Action in my final year of undergrad. It is extremely long and dense with ideas, and most of the early part is a refutation of the foundations of marxism and fascism. I wouldn't recommend anyone read it unless they are highly motivated and have lots of free time.

Jesus Huerta de Soto is the intellectual heir to Mises' financial theory. It would be a much better starting point.

Hans Hermann Hoppe is the heir to Mises' sociological theory. His books are also an excellent starting point.

Spitzer's picture

Richard Koo is no Austrian. That presentation was Keynes. I dont think Koo realizes that The US is different in that it is not funding its Keynsian witchcraft domestically

Anonymous's picture

Actually he does understand US isn't using its own money ( check the QnA after ) , but he thinks the trade balance and savings can wait to after "balance sheet recession" is fixed at the same time he says will take long time maybe a decade to fix the "balance sheets". Crazy.

Anonymous's picture

Actually he does understand US isn't using its own money ( check the QnA after ) , but he thinks the trade balance and savings can wait to after "balance sheet recession" is fixed at the same time he says will take long time maybe a decade to fix the "balance sheets". Crazy.

torabora's picture

I can see that Herr Spitznagel is never going to get a seat at the table.


Anonymous's picture


In case you haven't noticed, physicists (including Einstein, of course) have NOT produced a viable Unified Field Theory, so far.

Also in case you haven't noticed (Von Mises certainly didn't), while the government can screw around with interest rates all it likes, the government DOES NOT determine the amount of leveraged credit that is expanding or contracting (and it ends up babbling idiocy like "global savings glut" to hide its impotency regarding interest rates). Banks (and other financial creatures) make loans (or don't) according to the demand for loans in the marketplace (which is a risk/greed issue), and according to the risk/greed profiles of the banks (and other financial creatures), themselves. Overleveraging - the primary fuel of the bubbles of the 1920's and the 2000's - is not created by government fiat. Banks (and other financial creatures) borrow, loan, and leverage as they see fit until their bad bets and overleveraging lead to defaults and deleveraging. The government occasionally tries to limit overleveraging prior to the crash, and almost always tries to prevent deleveraging after the crash, but - and Austrians and Monetarists still can't grok this - it's the financial players in the free market who cause the bubbles and the busts.

And, if you really believe one can start by asserting general axioms of epistemology and then derive from them specific transactional causes and effects for complex global financial processes, I have some incredibly valuable Florida real estate I'd like to show you.

Econophile's picture

Are you sure you aren't The Cheeky Bastard under the cloak of Anonymity? Anyway, I realize that a unified field theory hasn't been achieved. Please allow me artistic license.

But, the government does control interest rates in a broad sense. Through reserve requirements (Tier 1), fractional reserve banking, and Fed Funds, and the host of other tools, they do control rates. They also control the money supply, contrary to your argument. While their policies don't always work because of stupid people like you and me who don't understand that "hoarding" is bad, they have their finger on the printing press. There has never been a case where bubbles weren't caused by monetary expansion by the central bank. And that's true in the U.S. before we had the Fed. Since the creation of the Fed we've had more and more cycles. Why don't they stop them if they have control? Don't accept Mises, read Rogoff and Reinhard.

But don't criticize Mises without reading his books. Read Mises and then argue.

Anonymous's picture

you make good points in regards to what makes credit demand but it seems to me a chicken and egg situation, our housing bubble an example.

Ostensibly because of post 9/11 recession, Fed reduced interest rates steadily and surely from early to mid 2000s, so that even when economy was apparenlty humming right along in say 2004, interest rates were as low as the later be quickly slice to in Jan of 2009.

Such low and steadily decreasing interest rates essentially was the printing of housing dollar, as every time interest rates decreased, people had more house money as a percentage of their montly wages to spend on a house. So inevitably we had housing inflation. It really closely tracks the interest rate reductions...the Fed basically handed new home buyers cash for the purchase, not unlike current $8000 tax credit.

So the artificial, centrally planned interest rate reductions increase housing prices....guess what happened next? Everybody wanted in on the game. Poor rentors, homeowners wanting a second home, investors, foreigners...loose lender standards become in vogue ....and the mania is on, baby. Social mood is for expansion, home builders expand, building block maker builds huge expensive plants, retail around the new houses expands in mega stores, everybody wants credit and everybody is willing to lend, and then suddenly there is no greater fool to pay interest payments, and crash.

So you can say it was just mania, but what started it? Interest rate reductions.

Now I think you can get manias in asset classes just by manipulating social herding say like the oil price run-up, which of course went up due to demand from US consumer and Chinsese factories...but then GSacs says no one is making oil any more and its going to $200 and then it crashes, as there are no greater fools to buy it.

So private markets can do manias on their own, but when you have central authorities that manipulate things outside market forces and can tighten or loosen policing and regulating, thus essentially tightening or loosening money supply, the govt or Fed or whoever is in charge can be a big or even the most important player in creating bubbles.
I tend to thing the manias lead to feed back loops where govt loosen as people generally loosen and vice versa, so its a whole social mood thing.

There are also fundemental technology changes that can burst something that isn't even a bubble necessarily, there was a crash in the value of beaver pelts in No America when Europeans adopted use of umbrellas rather than rain-proof hats, there farming switching form horses to tractors so less ag land needed for forage and planted ag land suddenly way more productive so ag land prices collapsed, most recently we have death of newspapers etc..

The trick is to save us from ourselves getting to caught in manias without overly messing things up in the way centrally planning can often mis-calculate. And find some healthy way to survive technical earthquakes such that creative destruction occurs with being to harsh and impoverishing.

Also, what I don't see in these analysis is the influence of who controls money. As it seems when money is spread fairly evenly throughout society, soem private, some local and national govt, lots of middle class, some big and lots of small buisnesses, economy is at its most innovative and procutive. But when money is controlled but just a few, either a central planning board of a USSR type state or by a oligarchy or facist elite or royalty or dictator or slave planatation owner, then e conomy as a whole does exteremenly poorly with most being impoverished. How do you thwart the concentration of wealth and power without overdoing and distorting markets?

Anonymous's picture

I too find that last paragraph to be gem.

It is at the foundation of why a capitalist system must have government intervention (graduated income tax) to maximize value. If left to its own devices, a capitalistic system will naturally move towards an oligarchic or fascist elite system. Over time, money concentrates in the hands of a few; stifling progress and innovation.

Gussiefink-nottle's picture

I think you make some good points here. Central planning of production of goods and services has a bad record be it in USSR, Eastern Europe or wherever. Central planning of the money supply is not much better, there are just too many variables.

There was a joke that was current in the Soviet Union before it all fell apart. A comrade ordered a new Lada car, and the factory told him he could take delivery some five years hence, the actual date being 23rd November. The guy says to the factory manager, "will that be in the morning or afternoon of the 23rd November?" The factory manager says "well it will probably be in the morning, but its in five years time so why do you want to know? The guy says "I've got the plumber coming in the afternoon."

Brett in Manhattan's picture

"The trick is to save us from ourselves getting to caught in manias without overly messing things up in the way centrally planning can often mis-calculate"


The problem is that human nature doesn't change.

Apocalypse Now's picture

I really liked your last paragraph, the key is making sure the most creative and ingenious ideas that benefit society (small businesses, entrepreneurial startups, and even corporations) receive adequate capital to bring their ideas to fruition.

The problem is distortion of the law to discourage new entrants including subsidies, regulations, and favorable tax structures for the connected large corporations that fund campaigns - rent seeking monopolistic behavior that is supposed to be illegal (anti-trust laws).

Without funding new ideas, we will have decay as we see today and complete collapse.  There is so much short term focus today based on election cycles, we are not planning for the future and it is a moral problem as well.  The concept of delayed gratification and the moral of saving has been completely lost, especially by the individuals in government deficit spending.  Studies on children show that the ones that will delay the receipt of one marshmallow for two marshmallows in 15 minutes typically are less impulsive and more successful.  Too bad these children aren't elected by the impulsive children.

The best governments seldom interfere in markets except to ensure fair capital allocation, protect against systemic risk, and a fair playing field (they can only steal from one group and give to another).  Today people get elected by campaigning as santa claus and promising something for nothing (moral hazard) despite record debt.  Nobody wants to vote for someone that tells them what they need to hear - eat your broccoli and exercise, instead it is just eat whatever you want and we'll give you "free" medical care.  It's not free.  It's not free, and we're morally bankrupt.

Dantzler's picture

nice post.

whoever flagged you is a douchebag.

can't wait until we have merit-based posting.


Catullus's picture

Excuse me, the Federal Reserve System and Legal Tender Laws constitute a "free market" how?  I didn't realize there was a "lender of last resort" in free market capitalism.  Because I thought if these "financial players in a free market" engaging in specific transactions in the "complex global financial process" fucked up, they had to eat it.  And if you fail to see how this explicit backing by a government printing press is not a moral hazard that causes the overleveraging, then I've got a $1 quadrillion wall of derivatives market to show you.

Just answer the questions the Austrians have at least been attempting to answer: why the boom and bust cycles?  Why do so many people get it wrong at the same time?  Why the "cluster of errors"?

Spitzer's picture

What about inflation targeting ? That is no Fed secret.

What about currency pegs by other governments that create trade imbalances ?

what about moral hazards like Fanny, Freddie and the bailouts ?

the government closed the gold window. ???



Anonymous's picture

Overleveraging occurs under both high (bank and junk bonds in 1970's and 1980's) and low (stocks, LBOs, and housing in 1990's and 2000's) Fed interest rate regimes. It usually moves from one sector to another (as the bubbles pop) and on a larger scale is only suppressed temporarily by crashes and deleveraging. The GD and recent Financial Crisis merely represent the crashes of unusually large and wide-spread (across multiple sectors and nations) binges of overleveraging. When it's only one sector in one country at a time (say junk bonds or stocks) the effect is not a Big Crash, but as sector crash and deleveraging. The government does not need to create the environment for overleveraging, it already exists whenever greed overcomes fear and credit is available. Crashes are the inherent and inevitable outcome of overleveraging. Of all the most extreme overleveraging that produced the recent Financial Crisis, the humble home mortgage is the hands-down winner. At 0% down payment the leverage is infinite and the interest rate is irrelevant (the buyer is only speculating on the rise in price - either to sell out at a profit or to refinance and pull out equity as profit). It doesn't take an Einstein or Von Mises to see that Ponzi finance has to collapse at some point. The only way you can stop speculators and idiots from overleveraging during the bubble phase of the cycle is for the government to directly control leveraging at all levels and in all locations - which is both impossible and the opposite of Von Mises' economic philosophy.

mannfm11's picture

Banks are endowed with the capacity to create many times more money than they possess.  This is called inflation.  Government created all kinds of silly means of getting around limitations that would prevent bubbles, crashes and just plain stupid investments, leading to massive waste of resources and human capital.  Without the Fed bailing out in the back and the FDIC providing a shield so depositors don't worry so much about over extended banks, we enter the realm of debt bondage and depression.  Mises and others if his line understood fully what was going on, but being we are all educated in the fashion that the central bankers wish (this includes myself, who took this backwards banking instruction called money and banking: the whole thing was a lie, save the fact that banks created deposits/liabilities), most of us miss the point because we are too smart. 

Anonymous's picture

I owe so much to Him it is beyond words. My first time I read him it was before the tech bubble. A very good scientist friend of mine behind the great fire wall working abroad was informed also of the others who carry the torch of reason and why. I feel his mind was more than a gift to mankind and even he would humble himself to convey the ideas of others to serve with principle and regard for others based on there gifts based on deeper principles you will find in the other 66 books compiled which pillar our civilization he clearly understood also as few will admit. The point is the message is more important than the messanger and reading his work was and is a priveledge as free men to other free men who as only freemen can do to serve others according to there gifts given. If you do not read his work you will never unfold your abilities and the reality he seen before and after his time. As for the current situation we are in he conveyed so much but clearly told us the Customer is the final arbiter and there is no unpopular government in the long run and why as few could ever do with no bias but true faith in reason ansd consequences which will come to pass. If you read it once you will never forget his work and the inprint you see on others who stray to there own peril to acountability given there bent of mind.

litoralkey's picture

Richard Koo did a series of elctures this spring... here is the 2nd best one I've seen...


d/l the powerpoint, put powerpoint slides on right half of screen, and video of lecture on left half, and follow along, also check out the end slides he didn't get to in the video.


Those reading this who are new or need a refreher on VonMises and Austrian economics... An extensive reading list...

Those new to the School should begin With Callahan's <b><a href="http://mises.org/books/econforrealpeople.pdf">Economics for Real People</a></b>, and subsequently Mises' <a href="http://mises.org/humanaction/pdf/humanaction.pdf"><b><i>Human Action</i></b></a>
torabora's picture

Thanks for Mises...I'm on it.

Anonymous's picture

Richard Koo has a video and powerpoint presentatino that everone should watch, put the video on left of screen, the powerpoint slides on the right, and follow along. Make sure to read the slides at the end he didn't have time to talk about in the video also.



Anonymous's picture

For any modern product of the American school system I recommend Mises Made Easier by Percy Greaves to go along with Human Action. One of the many great things about reading Human Action is it makes obvious how pathetically poor your education was. Without the Greaves book the many passages in Greek, Latin, French, German, etc. can be somewhat of a stumbling block.

Truly an amazing mind and reading his works has saved me a lot of money over the last 15 years by inoculating me from the stinking shitheap of quantified nonsense that is passed off as economics today.

With one short paper in 1922 he totally destroyed the entire intellectual foundation of socialism. Too bad nobody paid any attention.

RockyRacoon's picture

Here is a link to Mises Made Easier offered by The Mises Institute.


Don't pass up the chance to make Mises easier to read!


Anonymous's picture

I wish people would stop blaming Keynes for Milton Friedman's supply side economics... Greenspan is a disciple of Freidman and the Republicans are self serving converts to Greenspan's free wheeling monetarism and borrow and spend economics.

mannfm11's picture

I don't believe Friedman is any less Keynesian than Keynes.  Both were in faovr of governmental interference.  Carter appointed Volker, who used the ideas of monetarism in restricting the money supply, but instead created the basis of great debt and an asset bubble instead.  Out of control spending in the Keynesian ideas in government prior to 1980 created the inflation and destroyed the gold standard.  I believe government manipulators of the economy believe they can destroy mathematical reality.