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Robert Murphy's Retort To Paul Krugman On Austrian Business-Cycle Theory

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A must read reply to that discredited shaman of voodoonomics, Paul Krugman, by one of the more notable proponents of Austrian theory, Mises Institute's Robert Murphy.

My Reply to Krugman on Austrian Business-Cycle Theory, from Robert Murphy of the Ludwig von Mises Institute

As many readers already know, last week Paul Krugman linked to one of my Mises Daily articles explaining the importance of capital theory
in any discussion of the business cycle. Although Krugman graciously
described my fable about sushi-eating islanders as "the best exposition
I've seen yet of the Austrian view that's sweeping the GOP," naturally
he derided the approach as a "great leap backward" and a repudiation of
75 years of economic progress since the work of John Maynard Keynes. To
bolster his rejection, Krugman listed several problems he saw with the
Austrian understanding.

In the present article I'll first summarize the Austrian (in the
tradition of Ludwig von Mises) positions on capital theory, interest,
and the business cycle. With that as a backdrop, I will then answer
Krugman's specific objections.

The Austrians on Capital

In contrast to mainstream macro models, which either do not possess
capital at all or at best denote it as a homogenous stock of size "K,"
Austrian theory explicitly treats the capital structure of the economy
as a complex assortment of different tools, equipment, machinery,
inventories, and other goods in process. Much of the Austrian
perspective is dependent on this rich view of the economy's capital
structure, and mainstream economists miss out on many of the Austrian
insights when they make the "convenient" assumption that the economy has
one good. (Krugman will be glad to know that yes, I can spell all this
out in a formal model — and one that referee Paul Samuelson grudgingly
signed off on.Download PDF)

Krugman and other Keynesians stress the primacy of demand:
they keep pointing out that the owner of an electronics store, say,
won't have the incentive to hire more workers, and buy more inventory,
if he doesn't expect consumers will show up with money to spend on new
TVs or laptops.

But Austrians point out that demand per se is hardly the whole story:
Regardless of how many green pieces of paper the customers have, or how
much credit the store can get from the bank, it will be physically impossible for the electronics store to fill the shelves with new TVs and laptops unless the manufacturers of those items have already produced
them. And in turn, the manufacturers can't magically create TVs and
laptops merely because the demand for their products picks up; they rely
on other sectors in the economy having done the prior
preparation as well, such as mining the necessary metals, assembling the
proper amount of tractor trailers needed to ship the goods from the
factory, and so on.

These observations may strike some as trivial, not worthy of the
consideration of serious economists. But that's only because normally, a
market economy "spontaneously" solves this tremendous coordination
problem through prices and the corresponding signals of profit and loss.
If someone had to centrally plan an entire economy from scratch, there
would be all sorts of bottlenecks and waste — as the actual experience
of socialism has shown.

Without the guidance of market prices, we wouldn't observe a smoothly
functioning economy, where natural resources move down the chain of
production — from mining to processing to manufacturing to wholesale to
retail — as neatly depicted in macro textbooks. Instead, we would see a
chaotic muddle where the various interlocking processes didn't dovetail.
There would be too many hammers and not enough nails, too much
perishable food and not enough refrigerated railroad cars to deliver it,
and so on.

The Austrians on Interest

When it comes to explaining the coordinating function of market
prices, Austrians assign a very important role to interest rates, for
they steer the deployment of resources over time. Loosely
speaking, a high interest rate means that consumers are relatively
impatient, and penalize entrepreneurs heavily when they tie up resources
in long-term projects. In contrast, a low interest rate is the market's
green light to entrepreneurs that consumers are willing to wait longer
for the finished product, and so it is acceptable to tie up resources in
projects that will produce valuable goods and services at a much later
date.

In the Austrian conception, it is the interest rate that allows the
financial decisions of households to interact with the physical capital
structure, so that producers transform resources in the ways that best
satisfy consumer preferences. Consider a simple example that I use for
undergraduates: Suppose the economy is in an initial equilibrium where
households save 5 percent of their income. Then the households decide
that they want to have more for their retirement years, because they
don't want their standard of living to plummet once they stop working.
So all the households in the community begin saving 10 percent of their
income.

In the Austrian view, the interest rate is the primary mechanism
through which the economy adjusts to the change in preferences. (It's
not that people switched from buying hot dogs to hamburgers; instead
they switched from buying "present consumption" to buying "future
consumption.") The increased household saving pushes down interest
rates, and at the lower rates businesses can start long-term projects.
From the individual entrepreneur's point of view, the interest rate
affects the profitability of longer projects more than shorter
ones (as a simple "present-discounted-value" calculation shows). So a
lower interest rate doesn't merely stimulate "investment" but actually
gives a greater inducement to investment in durable, long-term goods, as
opposed to investment in nondurable, short-term goods.

How is it possible that the community as a whole can have more income in, say, 30 years? Obviously the households think it is financially possible, because their bank balances rise exponentially with the higher savings rate. But technologically
speaking, this is possible because the composition of physical output
changes. The households have cut back on going out to dinner, buying
iPods, and so on, in order to double their savings rate. This means that
restaurants, Apple stores, and other businesses catering to consumption
will have to lay off workers and scale back their operations. But that
means labor and other resources are freed up to expand output in the sectors making drill presses, tractors, and new factories.

In 30 years, the economy will be physically capable of much higher
output (including the production of consumer goods), because at that
time, workers will be using a larger accumulation of capital or
investment goods made during the previous three decades. That is how
everybody can have a higher standard of living, through savings.

The Austrians on the Business Cycle

Now that I've given a summary of the Austrian view of capital and
interest, we get the reward: their explanation of the business cycle.
When interest rates are pushed down below their market levels (by
expansionary central-bank policy, for example), this sets in motion the
same processes that would occur if there were an actual increase in
savings. In other words, at the lower interest rate, entrepreneurs find
it profitable to begin long-term projects; the capital-goods sectors of
the economy begin hiring workers and increasing output.

However, this expansion of the capital-goods sectors isn't
counterbalanced by a shrinking of the consumption-goods sectors, the way
it would be if households actually started saving more. Instead, the
households try to consume more too, because of the lower interest rates.

An unsustainable boom sets in, a temporary period of illusory
prosperity. Because every sector is expanding, there is a general
feeling of euphoria; it seems every business is having a "great year,"
and the unemployment rate falls below its "natural" level.

Unfortunately, at some point reality rears its ugly head. The central
bank hasn't created more resources simply by buying assets and lowering
interest rates. It is physically impossible for the economy to continue
cranking out the higher volume of consumption goods as well as the
increased output of capital goods. Eventually something has to give. The
reckoning will come sooner rather than later if rising asset or even
consumer prices makes the central bank reverse course and jack up
interest rates. But even if the central bank keeps rates permanently
down, eventually the physical realities will manifest themselves and the
economy will suffer a crash.

During the bust phase, entrepreneurs will reevaluate the situation.
If the government and central bank don't interfere, prices will give
accurate signals about which enterprises should be salvaged and which
should be scrapped. Those workers who are in unsustainable lines will be
laid off. It will take time for them to search through the developing
opportunities and find a niche that is suitable for their skills and is
sustainable in the new economy.

During this period of reevaluation and search, the measured
unemployment rate will be unusually high. It's not that workers are
"idle," or that their productivity has suddenly dropped to zero;
rather, it's that they need to be reallocated, and that takes time in a
complex, modern economy. This delay can be due to simple search, where
the workers have to look around to find the best spot that is already
"out there," or it can be due to the fact that they have to wait on
other workers to "get things ready" before the unemployed workers can
resume. (This is what happened in my sushi story.)

I'll stop the summary at this point in order to address Krugman's
objections. The interested reader can see more technical (yet still
accessible) expositions in this collection of essays,
while those interested in a graphical exposition (using mainstream
concepts such as the PPF) should check out Roger Garrison's fantastic PowerPoint presentations.

Answering Krugman

My reason for the lengthy summary is that I still get the sense that
Krugman truly doesn't understand the Austrian position. For example, he
asks, "Why is there overwhelming evidence that when central banks decide
to slow the economy, the economy does indeed slow?"
But because the Austrian theory says the bust occurs when the central
bank backs off and allows interest rates to rise toward their "correct"
level, this is hardly a problem. In fact, if central banks couldn't slow the economy, as an Austrian economist I would be worried about my theory.

Krugman also poses questions concerning (price) inflation rates and
the connection between nominal and real GDP. But I think he is
conflating the Austrian theory with a purely "real" business-cycle
theory. Austrians understand that monetary influences can have real
effects. To repeat, that is the very essence of the Mises-Hayek theory.

Although most of Krugman's objections are due to his unfamiliarity
with the actual Austrian theory, I think one source of confusion came
from the particular illustration I used in my article. First let's set
the context by quoting Krugman:

So what is the essence of this Austrian story? Basically, it says
that what we call an economic boom is actually something like China's
disastrous Great Leap Forward,
which led to a temporary surge in consumption but only at the expense
of degradation of the country's underlying productive capacity. And the
unemployment that follows is a result of that degradation: there's
simply nothing useful for the unemployed workers to do.

I like this story, and there are probably other cases besides China
1958–1961 to which it applies. But what reason do we have to think that
it has anything to do with the business cycles we actually see in
market economies?

First, I should say I'm glad that Krugman at least concedes that (his
understanding of) the Austrian explanation both is theoretically
possible and actually happens in the real world — coming from the guy
who referred to it in 1998 as equivalent to the "phlogiston theory of fire," this is progress!

However, Krugman still doesn't have quite the right understanding of
the Austrian view of the "capital consumption" that occurs during the
unsustainable boom. As I said above, on this particular issue the fault
lies with the necessarily simplistic "sushi model" I used in the article that Krugman read.

In that article, in order to make sure the reader really saw why
Krugman (and Tyler Cowen) were overlooking something basic, I had the
villagers boost their daily sushi intake even while they developed a new
technology to help augment their fishing. So during their "boom," it
would have seemed to a dull villager that both consumption and
investment were rising.

In my fable, this was physically possible because the villagers
neglected the regular maintenance of their boats and nets. This neglect
wouldn't show up overnight, but eventually the village economy would
crash. To repeat, I chose this illustration to make basic points about
the capital structure and how short-term consumption binges can be
physically possible, but must still be "paid for" in the long run.

Unfortunately, my fable and the lessons I drew from it gave the impression (see Tyler Cowen's critique)
that the Austrians think the "capital consumption" during the
unsustainable boom period must show up in things like reduced spending
on building maintenance, or perhaps in the owner of a fleet of trucks
neglecting to have the tires rotated.

In reality, it's more accurate to say that during the boom period,
entrepreneurs (led by false signals) invest in projects that are
individually rational and "efficient," but that don't mesh with
each other. In other words, it's not so much that a farmer forgets to
plant some of the seed corn in order to have a future crop. Rather, it's
that a farmer plans on expanding his output, and so he plants much more
than he did in the past, but unbeknownst to him, the owners of the
silos and railroads (needed to bring the harvest to market) aren't
expanding their own operations at the same pace.

In summary, it's not that the Austrians think an inspection of an
individual enterprise will reveal a technological deficiency. Rather,
it's that all of the entrepreneurs are "getting ahead of themselves,"
trying to develop too quickly. There aren't enough real savings to allow
all of the new processes to be completed. To capture this aspect of the
Austrian theory, Mises's analogy of a homebuilder (who draws up blueprints thinking he has more bricks than he really does) is still the best.

Krugman Wants to Know: Where's the Evidence?

This leads into Krugman's central complaint:

Oh, and what evidence is there that the economy's capacity is
damaged during booms? Investment rises, not falls, during booms; yes, I
know that Austrians take refuge in cosmic talk about the complexity of
production and how measured investment may not show what's really
happening, etc., but where's the positive evidence of what they're
claiming?

I can sympathize with Krugman, but there is no simple statistic to which we can point. Austrians are correct to say that "measured investment may not show what's really happening," and correct
to say that production is much more complex than depicted in Krugman's
models. This isn't "cosmic talk" but a statement of basic facts.

But to answer his question, Austrians certainly can point to
positive evidence of their view. For example, Austrians argue that
during the housing boom years, Americans didn't save enough out of their
wage and salary income, because they were misled into thinking they
were much wealthier than they really were. Then when reality set in the
illusion was shattered, and valuations of capital assets fell sharply.
Realizing they had made terrible decisions during the boom, Americans
sharply increased their savings. The data match this story pretty well:

Figure 1

The above chart shows that the savings rate (blue) plummeted during
the peak years of the housing bubble, as the S&P 500 (red) zoomed
upward. Then in late 2007 the stock market began crashing, while the
savings rate increased very sharply. The stock market turned around in
early 2009, of course, but from the Austrian perspective, this is
because the Fed's massive interventions — capped off by the first round
of "quantitative easing" (which was announced at this time) — started
artificially blowing up asset prices again.

We can also get hard empirical support for the Austrian claim that
the housing boom drew an unsustainable amount of real resources
(including labor) into that sector, which eventually collapsed and
caused a spike in unemployment. The following chart compares total
construction employment (blue line) with the home vacancy rate
(red line), which is a good indication of a speculative bubble: people
were buying homes not to live in, or even to rent out, but to "flip"
when the price went up. Notice the connection between the speculative
housing bubble and the workers sucked into — and then expelled from —
construction:

Figure 2

When it comes to applying the generic Austrian theory to the recent
boom-bust cycle, we have to think globally. During the boom, much of the
rising stream of consumption goods enjoyed by Americans was physically
produced in China and other foreign countries. To put it in terms
Krugman will appreciate, we could say that the boom period's surge in
imports (which "subtract" from GDP)
was consistent with a "healthy" string of GDP increases, not because of
counterbalancing exports, but rather because Americans and their
government kept spending more and more each year (thus boosting C, I, and G), more than offsetting the growing trade imbalance.

There is nothing wrong with a trade deficit (or more accurately, a current account deficit) per se; elsewhere I explained
how a very healthy and sustainably growing economy could have an
indefinite stream of such deficits, as the rest of the world rushed to
invest in a country blessed with attractive policies.

But when it comes to the actual housing boom under George W. Bush,
Americans' accumulation of SUVs, plasma-screen TVs, and gaming consoles
was clearly unsustainable. This is not because — as in my sushi story —
Americans were forgetting to do standard maintenance. Rather, it is
because Americans couldn't possibly have kept "total output" — which is
very imperfectly captured in our official GDP figures — at the dizzying
height at the end of the boom period, because it required foreign
producers to continue sending us goodies in exchange for ownership
claims on a growing collection of McMansions in which nobody could
afford to live.

To make sure that this intuitive story fits the facts, we can chart
an index of home prices (blue) against the current account balance
(red). The figure below illustrates quite nicely that as the housing
bubble inflated, the current account sank more deeply negative. Then the
housing bubble and the trade deficit both began collapsing at roughly
the same period, as American consumers (and foreign investors) came to
their senses.

Figure 3

Of course, Krugman's models and interpretation can incorporate the
above evidence too. So he could understandably claim that he has no
reason to credit the Austrian view over his own.

But I can point to at least two episodes where the
"sectoral-readjustment" story of the Austrians clearly has more
explanatory power than Krugman's "insufficient demand" story.
Specifically, in late 2008 Krugman argued
that the housing bust had little to do with the recession, because the
latest BLS figures showed that unemployment at the state level bore
little relationship to the declines in home prices across the states.

However, I pointed out that looking at year-over-year changes in unemployment at the end of 2008 was hardly the right test. If we looked at changes from the moment the housing bubble burst,
then five of the six states with the biggest housing declines were also
in the list of the six states with the biggest increases in
unemployment.

On another occasion (last summer), Krugman once again
thought he had dealt the readjustment story a crushing blow when he
pointed out that manufacturing had lost more jobs than construction. I pointed out that this too wasn't a valid test, because manufacturing had more workers to begin with. When we looked at percentage
declines, then construction did indeed crash more heavily than
manufacturing. Furthermore — and just as Austrian theory predicts — the
employment decline in durable-goods manufacturing was worse than
in nondurable-goods manufacturing, while the decline in the retail
sector was lighter than in the other three.

These are very important episodes. When Krugman thought the numbers
were on his side, he was happy to cast aspersions on the
sectoral-readjustment story; he thought his own model was perfectly able
to explain the situation if the crash in housing really didn't have much to do with the upheaval in the labor markets. And, as Krugman himself argued, had he been using valid tests, then the outcomes would indeed have been challenging to the Austrian story.

So now that we see the changes in employment really do match
up with the Austrian explanation, we should be much more confident that
it is capturing at least an important part of the story. To repeat, I
didn't set out to find data that matched the Misesian exposition and
then finally settled on some charts that did the trick. Rather, Krugman thought he had found a falsification of the theory, but it turned out he had conducted a poor experiment.

Because Krugman was the one who set up these two challenges, it is
significant that the Austrian theory passed with flying colors.
Furthermore, it is significant that Krugman's own theory cannot
explain the actual sectoral shifts in the labor markets. Remember,
Krugman wasn't at all embarrassed by the data when he (erroneously)
thought the housing bubble had little to do with the unemployment
problem.

This is very important, because it was Krugman who notoriously advocated (in 2002) and then defended (with caveats in 2006) the creation of a housing bubble.

I am not engaging in a character attack or "gotcha" by pointing this
out: it is very significant that Krugman's model prescribed a housing
bubble as a solution to the dotcom crash, even though — as we've seen —
Krugman's model is obviously inferior to the Austrian explanation when
it comes to assessing the fallout from the housing bubble.

Conclusion

I do not claim that the Austrian theory of the business cycle captures every pertinent feature of modern recessions. What I do
claim is that a theory — including any of Paul Krugman's Keynesian
models — that neglects the distortion of the capital structure during
boom periods cannot possibly hope to accurately prescribe policy
solutions after a crash.

 

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Mon, 01/24/2011 - 16:12 | 899804 RobotTrader
RobotTrader's picture

Must be some severe austerity and dramatic cutbacks in government spending coming.

Gold is getting smacked pretty hard in every single currency today.

Mon, 01/24/2011 - 16:15 | 899810 Crisismode
Crisismode's picture

As of this time, it is off .5% for the day. That is " getting smacked pretty hard"?

 

I'm wondering what adjectives you'd use if it were down 5% on the day.

Mon, 01/24/2011 - 16:21 | 899829 lieutenantjohnchard
lieutenantjohnchard's picture

same adjective - silence - that he's using for one of his pump jobs: goog down 5% today. must be those yoga tights that he wears all day.

Mon, 01/24/2011 - 16:46 | 899928 More Critical T...
More Critical Thinking Wanted's picture

 

How about 7% off its recent peak? Does that count as a 'drop in gold prices' in your book?

 

Mon, 01/24/2011 - 16:51 | 899947 CrockettAlmanac.com
CrockettAlmanac.com's picture

And how much value has the dollar lost since the creation of the Federal Reserve System? Does that qualify as government facilitation of the looting of the populace by the bankers in your book?

Mon, 01/24/2011 - 17:34 | 900063 More Critical T...
More Critical Thinking Wanted's picture

 

How much value has a pound of grain produced in 1913 have today? Near zero, it's all rotten for good. Does it mean that grain in general is worse today? Not at all.

So your point is pretty much nonsensical. Why should the real-value denomination of a currency in use a hundred years ago match up with a currency used in a vastly different civilization today?

Fact is that the quality of life has improved markedly since 1913. Cities are cleaner, most running water is clean and does not have human feces floating in it anymore, the air is actually breathable in suburbs and you do not have to worry that your savings will be gone poof in a day in a robber-baron 'gilded age' bank run and crash.

One of these years you might even stop worrying about you or your family being bankrupted by an unexpected, long-lasting, expensive to treat medical condition of you or of one of your loved ones.

All in one, civilization has advanced mostly for the better.

You are crying back the times when hoards of gold was inherited by rich brats across many generations undeservingly, free-loading on hard working american farmers. You are of the past and others simply do not share your utopian vision (or should I say nightmare?) where 'freedom' means 'freedom of the rich to freeload on others'.

 

Mon, 01/24/2011 - 17:37 | 900118 CrockettAlmanac.com
CrockettAlmanac.com's picture

How much value has a pound of grain produced in 1913 have today? Near zero, it's all rotten for good.

Your point is pretty much nonsensical.

Right. Money should not be a store of value. Money that loses value in a dramatic fashion is good for people -- especially for the working man who has no need of savings.

 

Fact is that the quality of life has improved markedly since 1913. Cities are cleaner, most running water is clean and does not have human feces floating in it anymore...

I did not realize that improvement of the sewage system was part of the Fed's charter. How did I miss that? And I forgot that all human progress is accomplished by bankers. Those silly working class folks don't do a damned thing. And the inventors and entrepreneurs are just a drag on society.

 

You are crying back the times when hoards of gold was inherited by rich brats across many generations undeservingly, free-loading on hard working american farmers.

Right. America became more agrarian after the Fed started making life easier for the family farmers of America. There are more family farms today than ever before and they are growing wholesome, organic foods. Thank God the Fed reduced the number of factory farms raising drugged animals and GMO crops.

 

Mon, 01/24/2011 - 17:47 | 900142 More Critical T...
More Critical Thinking Wanted's picture

 

Money should not be a store of value.

Wow, exactly, you are really getting the argument, finally!

Money as a 'store of value' was the barbarous relic of the medieval ages: when for hundreds of years generations of rich families controlled most of the economy and hoards of gold inherited with zero taxes were used to exclude pretty much everyone else who did not pick the right parents ...

Instead money should be a unit of account, and as such it should have relative stability over the short run only.

In the longer run money should implement entropy and should match the natural growth of the population and the growth of the interconnectedness of societies: firstly to recognize the growth and to give equal opportunity to the newcomers, and secondly to reward actual investment and hard work over passive rent-seeking 'hoarding' behavior.

Money should also make sure that those who earned money in the 'boom years' cannot sit on those (partly ill earned ...) proceeds while the kids pay off the debt ...

Money that loses value in a dramatic fashion is good for people -- especially for the working man who has no need of savings.

Now there's a heavy exaggeration. 2-4% inflation is hardly 'dramatic'. 10% is borderline, 20% is damaging, 30% or more is hyperinflation.

It took quite some time and quite some effort to cross those thresholds, even for an egregiously mismanaged authoritarian dictatorship like Zimbabwe. No developed country has managed to hit hyperinflation in the past 80 years. Deflation on the other hand is hitting some modern economies pretty hard ...

 

Mon, 01/24/2011 - 18:04 | 900228 faustian bargain
faustian bargain's picture

...and everything you've just said money should be, is leading us to economic collapse. The money you're talking about is a tool of tyranny. It punishes those who would save their capital to improve their productivity, and strips wealth from the middle class to line the pockets of international bankers and the political class. The creation of the Federal Reserve allowed the government to expand into world wars and massive spending programs that have led to our current $14trillion debt. Our economic growth over the past century has not been organic, it has been the product of highly artificial booms and busts, and the amount of malinvestment and market distortion is so huge now, we are on a Wile E Coyote sprint through midair. Gravity will take hold sooner or later, and the people who will be punished most are the ones who have had their wealth shaved away at 2-4% per year, for the past century.

Mon, 01/24/2011 - 18:46 | 900400 More Critical T...
More Critical Thinking Wanted's picture

 

I do not see it at all how what you say follows from what I said.

I listed very specific properties of money, and I listed the reasons.

Your central claim appears to be:

It punishes those who would save their capital to improve their productivity, and strips wealth from the middle class to line the pockets of international bankers and the political class.

Why would it punish those who use their capital to improve their productivity?

If a company uses the money to improve productivity then that money is spent and results in real, tangible income. That investment has created real tangible value in form of an expanded, more efficient production entity. As such it is largely inflation-neutral: the money has been spent so it will inflate only for those who decide to not use it for productive purposes.

That is actually a good thing. For some background, have a look at this older article (written well before the current crisis, in 1998):

http://www.slate.com/id/1937/

and see why and how the hoarding of 'baby-sitting coupons' can be counter-productive.

This kind of recession psychology is fundamentally present in all types of human societies and applies to money just a much.

 

Mon, 01/24/2011 - 18:14 | 900268 CrockettAlmanac.com
CrockettAlmanac.com's picture

Why do those who claim to be smarter and more compassionate than others always advocate policies which leave the working man destitute? You can go on and on about how bankers are the best friends of the poor but most folks ain't gonna fall for it.

Mon, 01/24/2011 - 18:36 | 900362 More Critical T...
More Critical Thinking Wanted's picture

 

I'm telling you the exact opposite: there were historic periods when medieval banksters of Europe with their hoards of gold were more powerful than all the kings at the time. Whole countries were running to them begging for resources. Famine and war was common, governments were weak - private interests were strong.

Do you really want that absolute rule of corrupt, monopolistic, unelected, inherited, sociopath companies again, do you want a weak government to run to the Rotschilds for bail-outs?

Or would you like it as it is today: as annoying as a strong central government may be at times, they are at least elected every two to four years and the typical bureaucrat worries about his next paycheck and benefits, not about ripping off the whole country for generations to come.

A government will also try (for electoral mathematics reasons) to offer central insurance against various forms of common harm, such as unexpected external aggression, be that of military, criminal, contractual, judicial or bacteriological nature - common aggressions against which private insurers never had any real interest in protecting in a fair, universal fashion - to all citizens, as a birthright. That concept works pretty well in northern parts of Europe.

You apparently desire the free, unfettered rule of private companies - while you apparently do not realize how much moral and material corruption such companies have caused in the past and how much pain they are causing today in all sorts of countries where governments are weak or non-existent. Ghana, anyone?

You are simply not offering any explanation why unfettered, unregulated 'freedom' for companies would not give them power over free citizens with time. What would prevent that from happening, while it happened so many times in the past and is occuring so many times even today, in areas of the world where there are no governments or where there are weak governments?

So yes, I can see some of the problem with governments (who cannot!), but the alternative you are offering is significantly, utterly worse - and you do not even seem to be realizing the validity of this counter-argument ...

 

Mon, 01/24/2011 - 18:49 | 900414 CrockettAlmanac.com
CrockettAlmanac.com's picture

Are you suggesting that by giving monopoly power to create legal tender out of thin air to a particular group of bankers the government has decreased rather than increased the power of those bankers?

Mon, 01/24/2011 - 19:22 | 900566 More Critical T...
More Critical Thinking Wanted's picture

 

I really do not want to ruin your otherwise nice rant with annoying facts, but FYI the barriers of entry to creating your own bank in the US are pretty low and you could do it today with the help of less than 5 million dollars. (Which is pretty low compared to some other industries dominated by private monopolies today.)

It's quite a hassle and the competition is pretty fierce, but hey, you too will be able to own a bank!

To be able to have reserves with the Fed and to be able to create legal tender you'll need to have a commercial bank license, which requires more capital - but you can do that too - and China has just bought one today.

Note that you'll only be able to issue legal tender up to a hard limit of about 10x of hard deposits. Unlimited money 'out of thin air' is a myth - fractional reserve banking allows flexible debt-money to be created only up to a limit. So if you want to print billions you need to attract billions in hard deposits first.

So is it really a monopoly if you could do it too with a new bank founded by yourself, given enough capital?

But yes, I'd agree that the banking industry as a whole has monopolistic structures as well (just not in the commercial money printing area) - I just don't see how the "no regulation at all" libertarian policy would not turn this into even larger, even more crippling monopolies ... :-)

Libertarians tend to forget that monopolies are the natural end game of free markets: big fish eats small fish and such, which natural company-aggregation process eventually runs into physical limits of the planet we live on.

 

Mon, 01/24/2011 - 20:23 | 900615 CrockettAlmanac.com
CrockettAlmanac.com's picture

Yes, please continue to explain how having the power to "only" create ten times the cash they actually have while legal tender laws compel all citizens to participate in this Ponzi scheme is actually bad for bankers and is good for the working man.

But really try to sell it this time.

Mon, 01/24/2011 - 21:00 | 900888 More Critical T...
More Critical Thinking Wanted's picture

 

LOL - you really are missing all the fundamentals! If you think that excessive debt and over-leverage was not possible under the gold standard you need to re-read history ... history is littered with such failures.

Bubbles do not need money to form - they never needed it. They only needed an inflated human belief in the inherent long-term value of a particular entity and anything would be enough to form the bubble: a piece of paper representing a stock, a promise in form of a hand-shake or just a shared belief in a given outcome. (And yes, there are even exotic historic examples of gold itself forming and causing bubbles and busts.)

Really, you are misunderstanding key elements of how economies work. You are striving for 'rigidity' where there is none: the world population is growing and the complexity of our society is growing. That, almost by definition, needs a flexible monetary base controlled via the interest rate and via fiscal policy - not a deadly rigid constant one coupled to the gold standard.

 

Mon, 01/24/2011 - 18:38 | 900328 Mark McGoldrick
Mark McGoldrick's picture

@More Critical Thinking...

Your ability to dismantle libertarian buffoonery is awe-inspiring.  

I hope you continue to reveal the truth for what it really is.  

This site seems to have morphed into an echo-chamber for crusty old primates. I suppose that's a good thing if you're on payroll at RBC trying to manage the Sprott ETFs or, more simply, selling bananas - but I prefer the truth without the banana flavoring.   

Keep posting!

Mon, 01/24/2011 - 18:54 | 900438 CrockettAlmanac.com
CrockettAlmanac.com's picture

You can keep fighting against freedom but don't be surprised if someday you get kicked in the teeth by someone who isn't into your particular brand of enlightenment.

Mon, 01/24/2011 - 19:00 | 900447 Mark McGoldrick
Mark McGoldrick's picture

I'm not worried about my freedom.  

I bought silver at $30, and it's going to $500. 

I got some "inside information" from a cartoon. 

Mon, 01/24/2011 - 19:01 | 900470 CrockettAlmanac.com
CrockettAlmanac.com's picture

That's really dumb.

Mon, 01/24/2011 - 19:04 | 900480 Mark McGoldrick
Mark McGoldrick's picture

You're partially right.  It's certainly dumb.  But it's also fraudulent. 

 

Mon, 01/24/2011 - 19:16 | 900543 CrockettAlmanac.com
CrockettAlmanac.com's picture

Thanks for admitting that your posts are fraudulent. Does your confession include the requisite  remorse which would compel you to stop wasting everybody's time with your pointless tripe?

Mon, 01/24/2011 - 19:35 | 900626 Mark McGoldrick
Mark McGoldrick's picture

You're right.  Not only should I apologize, I should report myself to FINRA. 

Mon, 01/24/2011 - 19:41 | 900648 CrockettAlmanac.com
CrockettAlmanac.com's picture

Please feel free to do what you believe is appropriate in regard to yourself in your own situation.  I'll do the same. (That's some more of that wacky libertarian thinking for you.)

Mon, 01/24/2011 - 21:06 | 900965 Sean7k
Sean7k's picture

One,4% inflation over 20 years will cause a dollar to fall to .44. That's pretty dramatic to a person living on retirement.

2. No fiat or gold bullion system has been able to keep money in supply equal to growth and recession (not even close), so which Unicorn country is going to provide this.

3. Money is a form of exchange not a form of wealth as you state above and then you say people cannot be allowed to sit on it (hoard). You can't have it both ways.

Where is all this deflation in modern economies you're talking about? China- inflation. US- inflation. EU-inflation. Russia-Inflation. India-inflation. Brazil-inflation. Australia-inflation.

That is what there CB's are saying. 

You play fast and loose with facts, you make assumptions about modern living conditions with no facts to back them up, in reality, you are a liar. A trolling liar. 

 

 

Mon, 01/24/2011 - 21:44 | 901120 More Critical T...
More Critical Thinking Wanted's picture

One, 4% inflation over 20 years will cause a dollar to fall to .44. That's pretty dramatic to a person living on retirement.

Civilized countries adjust pensions on an inflation-neutral basis. Sometimes over that, if the country is long-term prosperous. In dire times they are adjusted downwards.

Even if you self-invested all your money you can buy inflation-protected TIPS government bonds and stay above par.

2. No fiat or gold bullion system has been able to keep money in supply equal to growth and recession (not even close), so which Unicorn country is going to provide this.

But that's not the point nor is it desired: the money supply couples to the real economy via various hard to map and dynamic, often psychological channels of action. What works better in practice is to observe/measure production, trade and prices, and adjust rates and fiscal spending accordingly.

3. Money is a form of exchange not a form of wealth as you state above and then you say people cannot be allowed to sit on it (hoard). You can't have it both ways.

I did not say "people cannot be allowed to sit on it". They can stuff it in the mattress if they so wish.

I say that they should not be rewarded for hoarding with a rent or with price stability or even price deflation. There should be an incentive for resources to be utilized productively and 'doing nothing' is not productive by any definition of the word.

Where is all this deflation in modern economies you're talking about?

Recent examples are Japan, Hong Kong and Ireland. Switzerland on the brink. The US was on the brink up to QE2.

Crippling euro induced debt deflation in Spain, Portugal, Italy, Belgium, Greece - probably on the brink of outright price deflation as well, as demand is dropping.

Do you need more?

Really, many countries experienced inflation in the past, and in the past 80 years only Zimbabwe managed to hit outright hyperinflation - via decades of gross mismanagement. Believe me, countries did not hit hyperinflation due to lack of honest effort ;-)

In practice it's pretty hard to hit hyperinflation and once you are in it it's easy to get out: the old currency is crap so all debt in that currency is eliminated and a fresh start is guaranteed.

Deflation on the other hand is very sticky and very dangerous, due to its 'slow creeping' nature, due to the debt trap and due to the self-reinforcing positive feedback loop that encodes deflation expectations. Deflation usually even starts with denial - in 1998 austrians denied that Japan was in a liquidity trap ... (the whole idea of the lovely money supply causing trouble was alien to them - it took time for them to adjust the story)

The far-right is obsessed with hyperinflation for some weird irrational reason - probably because that's what according to Austrian theory the US should have ended up in it a long time ago already ...

 

Mon, 01/24/2011 - 22:21 | 901254 Sean7k
Sean7k's picture

Civilized countries adjust- what has that to do with your original comment? Liar.

Money supply growth is the point. It has never been accomplished. Liar.

Japan, Ireland and Hong Kong continue to inflate there economies and prices are rising. Japan would be the closest to your argument. You can't have it both ways. Liar.

Liquidity traps and deflation are not the same thing. You're misusing terms. Deflation is actually good for an economy in need of price equilibrium and discovery. It enhances workers pay values, retirement incomes and rewards savings. I thought it was all about the workers? Liar.

Japan has failed to create organic growth because they refused to deflate. They refused to allow write downs of bank debt and real estate values. They have used their in country savings rather than actually allow real price discovery. This has increasingly hurt the working man- remember him? You're not much of a champion.

Who is this far right you're talking about? Is that a slur to win points? Hyperinflation is not a monetary event, it is a loss of faith in the currency. It is social and political in nature. You would know this if you knew Austrian economics. Liar.

 

Mon, 01/24/2011 - 22:55 | 901372 More Critical T...
More Critical Thinking Wanted's picture

You are asking what it has to do with my original comment? It strengthens it: pensions in most civilized countries are adjusted so your "those who are living on retirements see .44 of the original value" argument is plainly false.

 

Mon, 01/24/2011 - 23:01 | 901389 Sean7k
Sean7k's picture

Your original post said 2-4% inflation was not dramatic. Your answer has nothing to do with that- you said a civilized country would change the rules. That has nothing to do with the effects of inflation. Liar.

Mon, 01/24/2011 - 23:16 | 901399 More Critical T...
More Critical Thinking Wanted's picture

2-4% is not dramatic at all, why would it be?

Your 'proof' of .44 over 20 years - which btw is an unfair exaggeration on your part: with 2% the result is 0.66 - simply does not apply because the most common forms of 'retirement' would be inflation protected in some form.

Also, if there's a recession it's all too natural to expect all segments of society to bear the burden of that - instead of guaranteeing fixed payments to those who collected retirement during the boom years ...

So you are exaggerating, you are misleading and you are claiming untruths.

Tue, 01/25/2011 - 00:23 | 901608 Sean7k
Sean7k's picture

Pensions and SS are tied to the CPI which does not include food and oil. Since most inflation has been in food and oil, how are these people protected? I think a continuous drop from 1600 a month to 800 would be dramatic. You picked the numbers and now you're complaining how they turn out? 

You want the wealthy to bear the burden of having made and saved money, now you want everyone? You are one inconsistent statement after another. Do you remember the lies you tell? Is that the problem?

You are the one misleading and using untruths. 

Mon, 01/24/2011 - 23:03 | 901391 More Critical T...
More Critical Thinking Wanted's picture

 

Japan, Ireland and Hong Kong continue to inflate there economies and prices are rising. Japan would be the closest to your argument.

LOL, I guess I really must have stepped on your nuts - sorry about that!

Firstly, how come you consider Japan only "close" to my argument? More than a decade of deflation only counts as 'close' in your book? :-)

You are the kind of person who is not taking 'yes' as an answer, right?

You outright ignored that both Hong Kong and Ireland had outright deflation as well.

You entirely ignored Switzerland which is flirting deflation, and you entirely ignored Spain, Portugal, Belgium et al who are facing very real debt deflation.

And you totally skipped the very real arguments about hyperinflation. Claiming that hyperinflation is not a monetary event is like claiming that being burried by an avalanche is not a snow related incident but a loss in confidence in solid footing  ;-)

So it's an epic fail from you on all questions so far, and you are following a rather dishonest style of discussion - I'm not not sure it's worth pursuing much more.

 

Tue, 01/25/2011 - 00:36 | 901645 Sean7k
Sean7k's picture

Show me the figures. You are making claims with nothing to back them up. The deflation in Japan has been in sectors. Their money supply is continuing to increase as is their debt. This is a sign of inflation- not deflation. 

The entire EU is reporting inflation of 2% and is their target. So, unless you can back it up, your statements mean nada.

Flirting with deflation is not deflation.

Debt deflation is a whole other subject, you can't section out part of the economy and ignore the rest.

Hyperinflation is a loss in the full faith and credit of a country and it's currency. It matters not what monetary policy is used, because it isn't a monetary problem. That is why a new currency is required. 

You're a liar, incapable of presenting a sensible argument or supporting it. You are incapable of defending it. You obfuscate and misrepresent material on a continuous basis. Changing the terms of the argument to escape challenge.

You act as if you are concerned with the common worker, as you defend a monetary system that only benefits the top 1%. The debt burden for future generations as you support a system that is dependent on an increasing debt load and increasing taxes.

You are a troll that works to bust up a thread that contains information that can help the common investor make sense out of present economic conditions. Which makes you beneath contempt.

 

 

 

 

 

Mon, 01/24/2011 - 23:13 | 901414 More Critical T...
More Critical Thinking Wanted's picture

 

Japan has failed to create organic growth because they refused to deflate. They refused to allow write downs of bank debt and real estate values. They have used their in country savings rather than actually allow real price discovery. This has increasingly hurt the working man- remember him? You're not much of a champion.

Erm, are you trying to argue that more than a decade of deflation in Japan did not happen? Are you trying to claim that a lost generation of youth is not unemployed in Japan? Are you claiming that over that decade the suicide rate has not raised dramatically in Japan?

My claim was that deflation is much harder to address than inflation, for various strong reasons. You come up with fancy theories about why Japan should have had it so easy to get out of deflation, if only they listened to your marvellous austrian advice. They did not get out of it, while tons of other countries failed to enter hyperinflation - your preferred bogeyman.

I am arguing reality, you are arguing utopia.

Dude, you are misleading and misrepresenting on a massive scale.

 

Tue, 01/25/2011 - 00:52 | 901659 Sean7k
Sean7k's picture

No, I am arguing that the Japanese have selectively managed monetary policy that has resulted in some deflation, some inflation, protecting banks, industry and export industries while allowing wages to stagnate and prices to rise. 

Real deflation is a short term market correction that allows for price discovery.It allows entrepreneurs to determine when it is profitable to re-enter the market, increasing employment, growth and production.

The monster of stagflation is what has fouled Japan and is only extended by their savings rate and willingness to finance Japan's debt at zero interest rates, rather than moving their savings into instruments they could earn better interest. This is because of Central Bank intervention- not deflation.

Japan's unemployment rate is 5%. Sounds a lot better than our youth rate of 20+% dependending on your ethnicity.

How is suicide pertinent. Try establishing that correlation. 

I have never encouraged hyperinflation, nor do an Austrians. They merely warn of the impending problems associated with creating debt without regard for the ability to service and retire that debt.

Your avatar is appropriate- a bag of hot air.

 

Mon, 01/24/2011 - 16:55 | 899961 ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture

Who are you quoting there exactly?

Mon, 01/24/2011 - 18:00 | 900213 More Critical T...
More Critical Thinking Wanted's picture

Thanks for the correction - should have quoted "getting smacked pretty hard".

Mon, 01/24/2011 - 18:16 | 900277 CrockettAlmanac.com
CrockettAlmanac.com's picture

But you have contended that money which loses value is a good thing. So if you believe that gold is getting smacked pretty hard that must be making it more attractive in your opinion, right?

Mon, 01/24/2011 - 20:06 | 900682 More Critical T...
More Critical Thinking Wanted's picture

 

Firstly, I do not have to 'believe' that gold is getting smacked pretty hard - I only need to look at the spot gold charts to see this undeniable fact.

Secondly, I think the price of gold is largely immaterial today. It is a metal which has use to make pretty things but is otherwise it is not very useful industrially. It has attracted a psychological property: the price of gold is loosely coupled to the amount of 'fear' present in the world as a whole. So if you want to trade on fear it's a good instrument. (Personally I prefer the VXX option chains as they correlate with fear much better, but hey, if gold works for you, by all means use it.)

After hundreds of years of use of gold as the 'gold standard' in the barbarous middle ages it's pretty telling (and pretty ironic) that today gold has degraded to a 'metric of fear' :-)

But personally I'd advise against using gold as a 'store of value'. As a reminder, if 30+ years ago you bought gold in the 1979-1980 inflation scare at the peak of the market, even today you'd be down with a brutal 70%+ draw-down of your original investment:

http://seekingalpha.com/article/167512-gold-s-real-inflation-adjusted-hi...

as the inflation-adjusted top of the gold market in 1980 was $7150 (!).

If you used that money in the stock market instead, you'd not have $1330 worth of gold today, but an about $50K worth of investment. So over a long period of time gold can literally be a 50x worse investment than a boring index-following fund ... Even with bonds you'd be somewhere around $20K - i.e. more than 10x better off than with gold.

It gets better: if instead of spending your $7150 on gold in 1980 you'd have waited 6 years for Microsoft's IPO, and bought 340 MSFT shares for that $7150, 9 stock splits later you'd today be a proud owner of nearly $5,000,000 worth of Microsoft stocks - instead of $1330 worth of one ounce of gold: a more than 3000x times higher return on investment.

Furthermore, if you used gold as a retirement investment in 1980 (as many old folks did it back then), and if you got seriously ill in the 90s when gold was at 4% of the original value of your investment (96% of a drawdown!), you were simply out of luck intending to pay your medical bills with that gold ... gold is mostly for those with particularly long lives, no illness, an austere life-style and an iron will to stomach decades of losing periods.

So IMO gold is not for everyone and there's certainly more stable investments available with less drawdown, or more profitable investments with more profit. As a long-term "store of value" it can be pretty lousy if you time the market in an unlucky way.

But by all means buy it! :-)

 

Mon, 01/24/2011 - 20:08 | 900736 CrockettAlmanac.com
CrockettAlmanac.com's picture

Please aim for some more consistency -- at least in the same thread. How can gold be getting "smacked down" if the price has fallen? You have said that money which loses its value is more valuable as money. Therefore, the price drop must be uplifting and not a "smack down."

In your cherry picked examples gold under performs other investments and so according to your theory that things which fall in value are good then you must like gold, isn't that correct?

 

 


Mon, 01/24/2011 - 20:58 | 900919 More Critical T...
More Critical Thinking Wanted's picture

 

You apparently have genuinely misunderstood what I wrote about inflation.

I said that flexible money with gradual, expected entropy (inflation of 2-4% annually) is a useful monetary system, for the many reasons I've outlined.

That does not magically reverse the mathematics of numbers: to the individual $2000 is still better than $1000. Nor does it magically turn the volatility of instruments into a virtue: a random 7% drop in the price of gold is still a smackdown to those speculators who bought gold at the top a few weeks ago when ZH was still pimping the new gold highs on a daily basis.

 

Mon, 01/24/2011 - 16:55 | 899962 lieutenantjohnchard
lieutenantjohnchard's picture

yep. and it hurts.

Mon, 01/24/2011 - 16:58 | 899974 velobabe
velobabe's picture

LuLu got a down grade. you won't have to pay full price any more, $170.00 for his girlie yoga tights†

Mon, 01/24/2011 - 18:55 | 900442 TruthInSunshine
TruthInSunshine's picture

Hey, Paul Krugman - go home and get your shine box.

Mon, 01/24/2011 - 16:29 | 899859 More Critical T...
More Critical Thinking Wanted's picture

 

Let me quote Murphy's central pro-Austrian argument:

This leads into Krugman's central complaint:

"Oh, and what evidence is there that the economy's capacity is damaged during booms? Investment rises, not falls, during booms; yes, I know that Austrians take refuge in cosmic talk about the complexity of production and how measured investment may not show what's really happening, etc., but where's the positive evidence of what they're claiming?"

 

I can sympathize with Krugman, but there is no simple statistic to which we can point. Austrians are correct to say that "measured investment may not show what's really happening," and correct to say that production is much more complex than depicted in Krugman's models. This isn't "cosmic talk" but a statement of basic facts.

Translation: Austrians cannot prove it but believe us, it's facts and do not believe the much simpler keynesian explanations!

Pretty lame IMO.

When austrians explain current events I feel like listening to a schoolboy explaining how aliens abducted his dog who then under duress ate his homework.

How come Krugman can explain things in 2-3 paragraphs (which can then be proven/disproven) while austrians must go on for pages and pages to get to the point, much of which is weasel worded?

 

Mon, 01/24/2011 - 16:34 | 899886 praetorian
praetorian's picture

Why does a teenager give simple, absolute answers to things like "Does God Exist?" while an older person gives a more nuanced and subjective one?

 

Answer: wisdom.

 

Cheers,

prat

Mon, 01/24/2011 - 16:53 | 899936 More Critical T...
More Critical Thinking Wanted's picture

 

Good!

So from today on we will change the rules of science and use the rules of religion instead: the longer, more convoluted, untested and unproven mathematical proof offered by older people will be considered the ultimately better one :-)

Way to go.

 

Mon, 01/24/2011 - 16:54 | 899957 CrockettAlmanac.com
CrockettAlmanac.com's picture

To which school of economics did Piltdown Man subscribe? Base you answer on the unswerving nature of scientific knowledge.

Mon, 01/24/2011 - 17:09 | 900004 More Critical T...
More Critical Thinking Wanted's picture

 

That's easy, given that Pierre was a jesuit priest it could only be the austrian faction.

(There's also a negative proof: a keynesian would have burried the skull in a coal-mine, and let it be dug up on government funding.)

So it's pretty clear-cut.


Mon, 01/24/2011 - 17:42 | 900134 CrockettAlmanac.com
CrockettAlmanac.com's picture

If it's so easy and clear cut how did you manage to get everything so absolutely wrong. Again.


Mon, 01/24/2011 - 17:18 | 900053 Raynja
Raynja's picture

I guess the simplest explanation for you is a phd from an ivy league school that taught you not to think, only to accept and protect the status quo, as it works out for 1% of the population.

Mon, 01/24/2011 - 19:26 | 900587 praetorian
praetorian's picture

It is not scientific to demand precision where none can exist.  It is scientistic.

 

I understand how, given todays education, it is easy to confuse the two.

 

Regards,

prat

Mon, 01/24/2011 - 17:05 | 900000 redrob25
redrob25's picture

Why does a teenager give simple, absolute answers to things like "Does God Exist?" while an older person gives a more nuanced and subjective one?

 

Answer: wisdom.

 

Cheers,

prat

 

Smackdown. The Austrian gave the more considered, thoughtful view.

 

Mon, 01/24/2011 - 17:11 | 900026 More Critical T...
More Critical Thinking Wanted's picture

 

If you want to do science like religion is practiced then sure go on and invest based on austrian theories. God help you! :-)

 

Mon, 01/24/2011 - 18:06 | 900239 faustian bargain
faustian bargain's picture

The mistake is in thinking that economics has to be either a science or a religion.

Mon, 01/24/2011 - 21:46 | 901134 More Critical T...
More Critical Thinking Wanted's picture

The mistake is to think that economics should be anything else but honest science.

Tue, 01/25/2011 - 12:03 | 902767 praetorian
praetorian's picture

I think the burden is on you to demonstrate that economics is, in any way, a science.

 

Say what one will about newtonian physics, but it works reasonably well.  Do you claim that modern economics has come close, even within 1%, even within .01% of the predictive power of newtonian physics?

 

If so, let us politely repair to our respective perferred drinking establishments and go about our business in peace.  There is little point in our talking.

 

I am certainly of the opinion that rubbing some maths on a chaotic system composed or masses or distinct and irrational agents, while certainly an excellent way to excuse siphoning money off of the productive economy to maintain a jesuitical, priestly elite, is in no way "scientific."

 

Cheers,

prat

Mon, 01/24/2011 - 18:25 | 900305 CrockettAlmanac.com
CrockettAlmanac.com's picture

If you want to do science like religion is practiced then sure go on and invest based on austrian theories. God help you! :-)

 

Keynesians believe that all people must kowtow to the arcane conjuring of learned men in the hidden cloisters of banking and government. THAT's religious. The independent human action prefered by Austrians is about as far away from being economically religious as possible.

Keynesians believe in received knowledge. Austrians advocate first hand experience.

Mon, 01/24/2011 - 22:24 | 901168 More Critical T...
More Critical Thinking Wanted's picture

 

Congratulations for raising that straw-man and beating it down so brutally! :-)

To debunk the Austrian theory of "independent human action" you should read this (short) explanation:

http://www.slate.com/id/1937/

The human psyche is not generally 'independent' - there are a lot of group think scenarios where supply combined with the "free individual" does not control the outcome, it is demand set by the psychology of the group of individuals that does.

This is an important detail of reality, and it is perhaps the biggest failure of Austrian theory that it does not deal with it at all - if you check this very article by Murphy it's all supply side economics.

And it's hard to take an economic theory seriously that for ideological reasons refuses to acknowledge the strong, influential and simple to see group think / herd nature of homo sapiens so stubbornly.

 

Mon, 01/24/2011 - 16:38 | 899902 Pladizow
Pladizow's picture

I see the steroids have effected more than just your avatar.

Mon, 01/24/2011 - 16:52 | 899949 More Critical T...
More Critical Thinking Wanted's picture

 

Hey, that was good!

In a similar vein, have they used silicon on you for brain enlargement as well? :)

 

Mon, 01/24/2011 - 19:06 | 900491 Sancho Ponzi
Sancho Ponzi's picture

Silicon is a hard substance used to manufacture semiconductors. SiliCONE is a gelatinous substance previously found in some breast implants.

Mon, 01/24/2011 - 22:25 | 901171 More Critical T...
More Critical Thinking Wanted's picture

I stand corrected!

Mon, 01/24/2011 - 16:40 | 899909 ThreeTrees
ThreeTrees's picture

Because economics requires more nuance than a few paragraphs permit?  It's true that brevity is the essence of wit but I've read Krugman, and wit is definitely not the impetus for his brevity.

Whenever I hear a neoclassicist explain current events I feel like I'm listening to a blind person describe colors.

 

Mon, 01/24/2011 - 16:59 | 899976 More Critical T...
More Critical Thinking Wanted's picture

 

The problem I see is not that austrian models do not offer simple explanations.

For decades those simple explanations were heralded as success.

It's just that those simple explanations have turned out to be fatally wrong in some key economic scenarios such as ZIRP. (Read: they predicted the exact opposite of what happened in the real world.)

That's where the convoluted austrian explanations started popping up - and at that point reasonable people really have to ask themselves: if you were wrong why dont you accept that you were wrong and build on the models of others which have proven more resilient to real world events?

Yes, you can certainly expand monetarism in an ad-hoc manner to become quasi-keynesian models. It just ceases being monetarism at that point. It will be a keynesian model in all but the name.

 

Mon, 01/24/2011 - 17:22 | 900071 Raynja
Raynja's picture

Wrong, austrian pov has been around for decades and held down by neoclassical. The outer failure of neoclassical made thinking people go reexamine austrian, please try again

Mon, 01/24/2011 - 19:10 | 900512 goldsaver
goldsaver's picture

The problem is not a Keynesian vs. Austrian vs. Monetarist. The problem is a Rotschild Ponzi. It doesn't matter which theories (and yes, they are all theories) you ascribe to. They all have a certain grain of truth. The problem is the false assumption. We are all assuming that the "economy" is operating in a dynamic free floating environment were actions and consequences follow logic and the laws of physics. Nothing could be further from the truth. World economy has been a series of lies, half truths and schemes for over 100 years. Where the creation of ledger entries and digital pixels provide greater wealth than the production of food or the extraction of energy. There is no logical reasoning behind economic theory because is all founded in a fallacy. 

Tell me, how can the man counting the tally sticks be more productive and therefore more deserving of wealth than the man making the tally sticks? How can a bread maker be less wealthy than a pixel pusher in Wall Street. Economic theory justifies this by claiming that the "investment" of the pixel pusher allows the baker to bake bread. But this is a fallacy. What did the pixel pusher provide that the baker needed? Credit? Is not the need for credit caused by the pixel pusher pilferage of the productivity of the bread maker? When Uncle Vinny loans a corner furniture store money for trucks, if the money came from stealing TVs from the furniture store. How did the furniture store benefit? Was it not their wealth to start with? When a banker loans you money he created out of thin air and charges you interest is he not pilfering your labor?

And that is the problem with all economic theories. From Marx to Friedman they all assume that they are operating in reality. It is all false.

So what is the truth? The truth is that debt coupons are a means for the unproductive to steal from the productive. Whether it is the politician picking your pocket with the threat of violence, in order to retain his power by transferring the stolen wealth to those that will keep him in power (and not just the poor. GE, GM, et al also participate in this scheme), to the super elite (Banking powers, IMF, UN, PBoC, etc), they all steal production from the producers.

A man that catches two fish and willingly trades one for a loaf of bread is engaging in free trade. A fishing company that has to take loans from a banker to purchase new boats because government regulation sponsored by a banker bought politician have made his boat legally incapable of catching fish is the victim of theft.

Mon, 01/24/2011 - 22:05 | 901197 More Critical T...
More Critical Thinking Wanted's picture

 

We are all assuming that the "economy" is operating in a dynamic free floating environment were actions and consequences follow logic and the laws of physics.

Not at all. Keynesian economics is pretty much based around the notion that non-trivial human psychologic effects control demand and as such the economy is markedly not a simple free floating 'engine' that can be predicted or auto-controlled.

Contrast that to advocates of Austrian or monetarist theories who believe in the 'free will individual' or in the 'efficient market hypothesis' (a form of individualism as well), which magically results in the optimal, self-tuning outcome with minimal or no government intervention. Market panics or lack of aggregate demand simply does not exist in their world view: it's all predictable cycles of something rotting deep inside and casuing lost supply of desired goods: which inefficiency must be calculated or austered away.

That is also why keynesian macro-models are much more successful at predicting and modelling real-world macro trajectories: they are mapping more aspects of reality and they do it more honestly.

 

Mon, 01/24/2011 - 16:45 | 899927 CrockettAlmanac.com
CrockettAlmanac.com's picture

I do not care to explain Austrian economics to you. I simply want others to stop using the government to force Keynesian economics on me.

Mon, 01/24/2011 - 17:33 | 900109 N_Jones
N_Jones's picture

+100

Mon, 01/24/2011 - 18:05 | 900234 More Critical T...
More Critical Thinking Wanted's picture

 

So you complain about gravity as well?

Reality is a tough bitch.

 

Mon, 01/24/2011 - 18:26 | 900323 CrockettAlmanac.com
CrockettAlmanac.com's picture

What do lazily constructed straw men have to do with "More Critical Thinking?"

Mon, 01/24/2011 - 18:46 | 900403 Burnbright
Burnbright's picture

Didn't you know trolls eat straw men for breakfast.

Mon, 01/24/2011 - 19:06 | 900457 CrockettAlmanac.com
CrockettAlmanac.com's picture

I just expect a more substantial argument from those who would claim to be so much smarter than me that they have the right to compel me to participate in their "safety net."

Silly me.

Mon, 01/24/2011 - 22:10 | 901213 More Critical T...
More Critical Thinking Wanted's picture

 

I guess my point flew by you at a very large distance.

You complaining about keynesian economics is IMO like complaining about the laws of gravity. Both explain reality pretty well so you need to turn with your complaint to whatever man in the sky you believe in created this whole universe. Ask to be in an Austrian universe for your next reincarnation or something. (Does your god offer reincarnations?)

Meanwhile, in this universe, buildings will be constructed according to the laws of gravity and economic policies will be shaped along principles that work in practice.

 

Mon, 01/24/2011 - 16:54 | 899955 Sean7k
Sean7k's picture

I thought Murphy provided a well detailed explanation and defense of topic. It is unfortunately he couldn't keep it down to a few sentences for you. Reading a complete article and analyzing the accompanying charts, while proving too difficult for you, is appreciated by those that take the study of economics seriously.

Mon, 01/24/2011 - 18:21 | 900297 More Critical T...
More Critical Thinking Wanted's picture

 

Go read this (rather entertaining and rather short) Krugman article from more than 13 years ago (1998):

http://www.slate.com/id/1937/

And tell me it does not describe the fundamental psychology of the 2008-2009 recession in strikingly accurate terms ...

Now go back and read one of the austrian explanations to the financial crisis, and tell me that they are right, and tell that with a straight face ...

 

Mon, 01/24/2011 - 18:41 | 900372 CrockettAlmanac.com
CrockettAlmanac.com's picture

Ron Paul predicted the events of 2008 quite clearly in this 2002 speech:

Government Mortgage Schemes Distort the Housing Market

http://paul.house.gov/index.php?option=com_content&task=view&id=323&Item...

Congressman Ron Paul U.S. House of Representatives July 16, 2002

Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for housing-related government sponsored enterprises (GSEs). These entities are the Federal National Mortgage Association (Fannie), the Federal Home Loan Mortgage Corporation (Freddie), and the National Home Loan Bank Board (HLBB). According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.

One of the major government privileges granted these GSEs is a line of credit to the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out these GSEs in times of economic difficulty helps them attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of housing-related GSEs. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Speaker, it is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market. I therefore hope my colleagues will stand up for American taxpayers and investors by cosponsoring the Free Housing Market Enhancement Act.

 

 

In 2002 Krugman actually said that a housing bubble would be a good thing:

 

Dubya's Double Dip?

By PAUL KRUGMAN
Published: August 02, 2002

 

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?pagewa...

 

Mon, 01/24/2011 - 22:36 | 901303 More Critical T...
More Critical Thinking Wanted's picture

 

Well, to Ron Paul's credit, he has blamed everything on the government and predicted various excesses in the past two decades so he was bound to be close to the mark once, like a broken clock.

His notion that the government has caused the housing bubble has been debunked numerous times - if you look at the data you'll see that it was the private mortgage industry that was driving much of the mortgage bubble - the GSEs just followed through (to a lesser degree), partly due to GOP pressure :-)

Here's where you can see the fuller picture:

http://economistsview.typepad.com/.shared/image.html?/photos/uncategoriz...

http://www.princeton.edu/~pkrugman/ffdelta.PNG

Look at how the GSEs disappeared during much of the peak of the bubble, while private mortgage lenders were driving the bubble?

So no, Ron Paul's conspiracy is not even close to be correct. It does not need a government to form a bubble - it simply needs old fashioned human greed - and that's always plenty.

Tue, 01/25/2011 - 01:28 | 901717 Samuel Morales Jr.
Samuel Morales Jr.'s picture

The fact that most of the mortgage market was private doesn't disprove that government didn't have a hand in creating a housing bubble. GSE's were a no brainer avenue to sell mortgages to. It could be said that GSE's created a snowball effect, and yes politicians, and activist extorted lenders to mortgage minorities, and low income people. Yes human greed can get out of hand when human believe there is no consequences to his own greed. Housing bubble was very simple to spot, and it is in a bear market for at least a few years in the future. Everybody thought home prices can never fall, because of long historical trends of housing appreciating. For even Krugman to advocate a housing bubble, or not, shows the mentality the man has whether he was joking, or not.  This created a mania of average joe flipping houses, and plunging into the equity of their homes. Of course if the psychology of the market is invincibility, get rich easy, buy much more consumer goods just by owning a house, and the thought that home prices will never fall, you get that kind of greed. I also find your deflation vs inflation fallicious. Deflation can be caused by inflation. Housing bubble was inflation. Speculatory money hit housing, which caused rapid inflation in prices. You say that deflation is much bigger threat than inflation. Well that is what Greenspan thought when the internet bubble burst, so he inflated the economy to prevent a deflationary spiral. He followed the mainstream course of action, guess what, he caused a bigger deflationary spiral that was much bigger than the deflation caused by internet bubble. The internet bubble was very different, which was greed fueled too, but it was relegated mostly to people with their own money hoping for a rocket ship with no fuel to take off, which never did for most of them. That is the problem, the Fed can't accurately get infront of the inflationary curve in time, because like most things in macoeconomics, there is a time lag. The hysterial fear of deflation creates more inflation that creates more deflation. Your definition of inflation is pretty simple, that is general prices of everything rising. No, no. Inflation doesn't spread out evenly across the economy. You correct that the market is that of psychology, of what humans percieve, and monetary policy, or Keynesianism doesn't remove that factor at all. There wasn't much of savings glut either, and people who defaulted on their mortgages simply couldn't afford their homes refinanced, or simply don't want the mortgage. The former genuinely couldn't afford it, so no psychology there to determine their faith, but rather reality. Is there inflation today, yes there is. Inflation isn't just printing money out of thin air, if a central bank even borrows a lot of money, and pumps it to a domestic economy, that is inflationary as well.

Mon, 01/24/2011 - 22:48 | 901350 More Critical T...
More Critical Thinking Wanted's picture

btw., have you read the whole Krugman article, including this bit:

Bear in mind also that government officials have a stake in accentuating the positive. The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble.

It puts the paragraph you quoted in quite a different light ... See:

http://caps.fool.com/Blogs/did-mish-try-to-mislead-us/213564

 

Mon, 01/24/2011 - 19:12 | 900508 Sean7k
Sean7k's picture

How do you compare a barter system with one single item to an entire economy? What happens here, is that some people end up with more than they can ever use and others end up abusing the system. Oh wait, then you introduce cash payments for the problems-what does the FED just introduce a new currency now? To augment the coupon currency?Of course, then they had to create an enforcement mechanism  and record keeping (police powers). 

I think your example is problematic. Let's move to what you obviously want to defend: monetarism and the use of TARP, etc. to stimulate the economy. If what your story contends is correct, there would have been similar results- the economy would have righted itself, employment would have been stimulated and savings would have decreased as more coupons were spent.

Does unemployment improve? No. U-6 figures are pretty clear in this regard as is the article above if you had read about the effects on employment. Did savings decrease? Yes, but again, for the same reasons cited by the Mr. Murphy. They now wanted to spend as too much script was entering the system and they might lose value(inflation and if there is a loss of faith- hyperinflation). 

You will have to pick the "austrian explanation" you want to consider, as I am unaware of which one you want to critique. However, I will say this, none of us- Mr. Murphy, you or myself have any idea of what the central banks did during this time. Bernanke wouldn't divulge how he "saved" the system, he just told us he did. We have no idea what was added to the FED balance sheets or those of other Central Banks. Meaning, it is very easy to criticize any school of thought here, but intellectually lazy to accuse someone of trying to cover all their bases. 

I get it that you don't like Austrian economics. I imagine you've realized I think Keynsian socialism and fascist monetarism are inferior economic systems and solutions for our current economic woes.I think the author explained the 2008-2011 and continuing depression extremely well. So, here's my bet to you: Krugman is advocating even greater monetary infusions. This bet means if you're a Krugmanite, you buy stocks and bonds, if you're an Austrian, you buy gold and commodity assets as well as other foreign investments to protect against dollar devaluation.

Let me know how well that works out for you.

Mon, 01/24/2011 - 21:10 | 900986 KickIce
KickIce's picture

Where do the Chinese babysitters come in that result in job losses?

Mon, 01/24/2011 - 21:14 | 901001 Hey Assholes
Hey Assholes's picture

For M.C.T. -

Man are you stupid.

I will never waste my time reading your tripe again.

"You can ignore reality, but you cannot ignore the consequences of ignoring reality" - Ayn Rand

Mon, 01/24/2011 - 16:54 | 899956 WeimarRepublican
WeimarRepublican's picture

You cannot "prove" most theories in Economics as if they were merely mathematical exercises. The austrian standpoint could be summarized in very briefly: the heterogeneity of capital makes the traditional keynesian aggregates meaningless, since artificially low interest rates makes the economy drift away even further from its equilibrium point. But would Krugman understand anything? He has fundamentally misunderstood the austrian theory, so what good would an overly simplified version do to him?

Mon, 01/24/2011 - 16:55 | 899963 Chump
Chump's picture

I like how you cut your quote right before:

But to answer his question, Austrians certainly can point to positive evidence of their view. For example...[example continues]

Your username must be self-descriptive.

"How come Krugman can explain things in 2-3 paragraphs (which can then be proven/disproven) while austrians must go on for pages and pages to get to the point, much of which is weasel worded?"

Translation: Read???  Me no likey!

How the hell did you get past the CAPTCHA??

Mon, 01/24/2011 - 17:06 | 900005 lieutenantjohnchard
lieutenantjohnchard's picture

i'll simplify it for you: ignore the austrians and follow krugman. nobody is forcing you to accept austrianomics, or buy american eagles like many of us etc ...

in other words, many of us feel the same way about krugman as you do the austrians.

Mon, 01/24/2011 - 18:28 | 900330 A Nanny Moose
A Nanny Moose's picture

You and your statist pals need some new kneepads yet?

Mon, 01/24/2011 - 16:18 | 899821 faustian bargain
faustian bargain's picture

LOL, gold doomer.

Mon, 01/24/2011 - 16:24 | 899823 CrockettAlmanac.com
CrockettAlmanac.com's picture

You didn't read the detailed article above but you took an opportunity to post something completely off topic. Contemplating one's own navel is much more important than listening to others and then responding in a relevant manner. So you're good.

Mon, 01/24/2011 - 16:20 | 899825 walküre
walküre's picture

Is it real selling of physical gold and silver?

No austerity or cutbacks in the world can fix the debt problem.

Gold and silver investors KNOW this. So, please pray tell who is selling?

This reeks of manipulation by desperate men clinging desperately onto their paper wealth.

Secret money dilution is still dilution and as producer, I'm not going to sell for THEIR paper price. EOS.

 

Mon, 01/24/2011 - 16:25 | 899849 lieutenantjohnchard
lieutenantjohnchard's picture

keep in mind the robo uber bull wanna be said he was a pm bull last thursday.

Mon, 01/24/2011 - 16:44 | 899926 Temporalist
Temporalist's picture

A Robodouche can be both bull and bear...like a worm or reptile can alternate between male and female or be both simultaneously.

Mon, 01/24/2011 - 16:54 | 899954 lieutenantjohnchard
lieutenantjohnchard's picture

lol! when robodouche wears his yoga tights i'm sure heterosexual men give him a wide berth.

Mon, 01/24/2011 - 17:01 | 899986 velobabe
velobabe's picture

or a good PM paper spread, thingy.

Mon, 01/24/2011 - 16:28 | 899858 Conrad Murray
Conrad Murray's picture

Oooh ooooh let me jump in and say something bashful and completely irrelevant to the topic at hand! RobotTrader, you are so stupid. Gold is gonna go up 4EVA. You can't eat paper. OMGz did you see DEM JETZ?!?!

One time, at band camp I had a cold fusion sandwich and there was DOOM gold in the jew. Then the Jonas Brothers came by and made Beliebers out of us all.

Later, I was on my way to 23 and Paul Kurgman came by to dish out More Critical Thinking and the hotsauce wasn't even beige? What kind of pants did that giraffe have on? I mean it's not like wind can go down a shampoo without proper OSHA fish.

But seriously, if you all think your disinformation campaign will work on my tried and true wits, you've got another thing coming. I see through the fog and the peanut butter over there on the other side ISN'T MADE FROM TOMATOES!!

You can't eat it. You've never been able to eat it. Ask the Arkansas birds. They went the way of the dodo to prove light is thinner than amarillo. Yes, I speak more times than kinds. Now, if you are thouroughly through PLEASE wipe you door on the way in!

kthanksbai

Mon, 01/24/2011 - 16:32 | 899873 Infinite QE
Infinite QE's picture

"McDonald’s likely to hike prices as costs rise"

Better hit your mom up for an increase in your allowance. How much of your trust fund did you blow shorting Apple last week? 

Mon, 01/24/2011 - 16:51 | 899946 walküre
walküre's picture

A family can dine at McDonald's for the cost of an oz silver.

Soon the family will have to pay 2 oz of silver?

Really? And surely silver is just as easy to produce as artificial meats and dairy?

Gotta love the cabal and their "ways".

McDonald's is a team player though. They will continue to retail their food for diluted worthless paper.

But when customers opt to buy silver instead of eating there, they too will have a problem.

Mon, 01/24/2011 - 16:46 | 899929 SheepDog-One
SheepDog-One's picture

How bout that Goggle? Getting smacked way harder than gold.

Mon, 01/24/2011 - 17:41 | 900132 Al89
Al89's picture

Just like the severe cut back and austerity that took place in 2008 and at the end of 2009 and start of 2010 when gold also dipped? I guess I missed all those cuts.

Mon, 01/24/2011 - 20:12 | 900749 Dr_Dazed
Dr_Dazed's picture

WTF??  Why does everything have to revert ot a discussion of Gold, Silver or commidities here?  Come on guys and gals there's more to the world economy than PM and oil, corn and rice.  This is a substantive contribution that ought to be cause for debate on it's merits, not just another slug fest about gold or a flame war.  Jeez, ZH is becoming a kindergarden.

Mon, 01/24/2011 - 16:18 | 899820 jus_lite_reading
jus_lite_reading's picture

TD- Give up already will ya? The Fed is officially "unsinkable" and all nations can print endless amounts of "money" as needed. All problems solved.

 

Every man will have a castle and a roast duck!

Mon, 01/24/2011 - 16:27 | 899855 SheepDog-One
SheepDog-One's picture

Right, the new economic model has been perfected- just print endless MT Everest's of money daily. All previous stodgy dusty ideas of 'economics' are out the window now that the new system is firmly in place! DOW 13,00 a given, 14,000 a certainty, anyone not buying now for mid 2011 DOW 15,000 just doesnt get the 'new economics'! 'But food and energy are going sky high and the people are broke' you say? Who cares, stocks are up and thats all that matters!

Mon, 01/24/2011 - 16:23 | 899836 Spalding_Smailes
Spalding_Smailes's picture

Miners getting slapped around like a Korean hooker'  .....

 

Mon, 01/24/2011 - 16:30 | 899864 goldmiddelfinger
goldmiddelfinger's picture

Gold down today on a big Russina Central Bank buy announcement.

 

Mon, 01/24/2011 - 16:56 | 899950 SheepDog-One
SheepDog-One's picture

Gold down about 5% from highs, yea for sure its over, that was a terrible idea to buy it at $500. And whats with these moron Chinese and Russians announcing theyre stockpiling gold hand over fist? Dont they know they should buy the US stock dip...although there never is one?

Mon, 01/24/2011 - 16:58 | 899972 ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture

I'm gonna miss the paper-bugs when they are gone one day, without a trace or any sort of accountability.

Mon, 01/24/2011 - 17:38 | 900127 goldmiddelfinger
goldmiddelfinger's picture

You 2 clowns calling a bottom in gold here?

Mon, 01/24/2011 - 18:52 | 900424 Burnbright
Burnbright's picture

Gold, the metal, not the ETF will not drop under 1350 an ounce. GLD could drop to 0.

Mon, 01/24/2011 - 23:45 | 901525 bingocat
bingocat's picture

Hmmm...  itwas below 1350 on Friday, before you said this. Then it dropped a percent from its Monday highs into Tuesday AM...

OK...

Mon, 01/24/2011 - 16:53 | 899953 Sudden Debt
Sudden Debt's picture

Never tried one of those. Are they any good?

Koreans have flat noses and look more white right?

Mon, 01/24/2011 - 16:23 | 899838 Horatio Beanblower
Horatio Beanblower's picture

Ron Paul (2012) is looking for an Austrian economist to join his staff.  Robert Murphy is surely that man.

Mon, 01/24/2011 - 16:24 | 899843 walküre
walküre's picture

You can't cheat physics and mathematics.

http://outerdnn.outer.jhuapl.edu/rethinking/VideoArchives/MrJamesGRickardsPresentationVideo.aspx

It's impossible to continue to spend more than you have.

Worse even, spend more capital than you're able to raise in the open market. Thus print more of your own money to buy more of your own debt.

Much worse is to print money to make the interest payments on debt that has been made over time.

Game is up bankers.

Mon, 01/24/2011 - 16:41 | 899861 SheepDog-One
SheepDog-One's picture

WHAT?? What manner of blasphemous heresy against the FED Emperors is this! Guards! Seize that man! Nobody expects the Spanish Inquisition!!
http://www.youtube.com/watch?v=CSe38dzJYkY

Mon, 01/24/2011 - 16:41 | 899917 walküre
walküre's picture

The cabal has nowhere to hide. Russia and China are simply too rich and strong for the typical run of the mill intimidation tactics by the cabal and their friends in Langley.

Surpressing the price of finite commodities against a worthless Dollar issued by a bankrupt nation; they must be joking!

The latest price drops barely even register at the bullion dealerships. The spreads between bids and asks are getting wider and wider.

There are no or few sellers willing to part with the metal for the funny money set by a funny exchange in a funny money nation.

It IS OVER.

What's worse.. the more they manipulate, the more they piss off producers of oil and metals to seek NON-USD denominated contracts with Europe, Russia and China.

Forget deflation, inflation, hyper inflation.

Default of all Dollar denominated paper "assets" is the only possible outcome.

Mon, 01/24/2011 - 17:23 | 900076 shortus cynicus
shortus cynicus's picture

Just heard one story, that the swiss are buing polish silver (KGHM) directly, official at LBMA prices.

What a joke would it be to sell real stuff so cheap assuming you have some capital reserves and energy prices are climbing.

Mon, 01/24/2011 - 16:36 | 899894 docj
docj's picture

HERETIC!!

Heh.  Cheers -

Mon, 01/24/2011 - 16:28 | 899856 fearsomepirate
fearsomepirate's picture

It always fascinates me how Keynesians actively argue they can ignore what is clearly a critically key part of any economy. 

Mon, 01/24/2011 - 16:31 | 899867 spekulatn
spekulatn's picture

Slightly off topic,

 

Mises Institute has published a pdf of volume 1 of Rothbard's "Conceived in Liberty ," which provides an excellent overview of the history of the colonies from a Libertarian point of view. Many thanks to the chair who is especially noted by the Mises Institute for his munificence and appreciation in assisting in publishing this seminal publication in the electronic arena. This online publication is evidence of the superiority of the private sector vs the government as one speculates that the government and its agents would not even bother with a history that flies in the face of many popularly held conventions. Many of the popular, mostly undisputed memes include "Washington chopping down the cherry tree," "Honest Abe," and "The manufactured story about the traitor Benedict Arnold,' and too many others to list.

 

http://www.dailyspeculations.com/wordpress/?p=5823

Mon, 01/24/2011 - 16:31 | 899870 Slow learner
Mon, 01/24/2011 - 16:35 | 899891 JW n FL
JW n FL's picture

look... everyone trade your PM's in for Paper (Currency), then trade it for some more paper (stocks, etf's or other currencies)... and hope that Ben never spots printing!

Thats good sound and free advice...

Mon, 01/24/2011 - 16:40 | 899911 SheepDog-One
SheepDog-One's picture

True! Trade your paper for other paper, never hold icky gold and silver, and Ben wil just keep printing to infinity while no other economic factors ever trump the print meister, stocks will always go up and all is well! What could possibly go wrong? I just assume all is well and sleep well at night knowing Zionist Ben Shalom definitely has my well being first and foremost concern.

Mon, 01/24/2011 - 16:43 | 899924 jeffca
jeffca's picture

If Krugman admits there are some holes in neo-keynsian economics than he will very well lose his NYT column.   I think at times, the problem would be similar to Einstein trying to explain Quantum Mechanics to Newton.  

Mon, 01/24/2011 - 16:43 | 899925 crzyhun
crzyhun's picture

The article speaks for itself- if you bother reading it.

The matter with keynes was also and recently described by Hunter Lewis in his concise book, "Where Kenes went wrong."

No matter to you K lovers, I' m sure.

Mon, 01/24/2011 - 16:56 | 899959 Dr. Acula
Dr. Acula's picture

Keynes' pseudoscience was thoroughly debunked 50 years ago by Henry Hazlitt in "Failure of the New Economics".

 

Mon, 01/24/2011 - 16:47 | 899933 tgatliff
tgatliff's picture

Most agreed in 2008 that the mainstream Keynesian models had failed us, but rather than suffer from a "global reset" as was the buzzword at the time, it was decided that kicking the can a couple more years was the best way of moving forward.  Rule of law be damned...

Mon, 01/24/2011 - 16:53 | 899952 your neighbor
your neighbor's picture

Most here agree that Comex contracts are a sham. GLD and SLV are shams. Then why do we expect them to go up? These things are manipulated vehicles for the casino to fleece people. The day that Comex fails, will you be buying or selling contracts? The day that GLD and SLV are proven to be a shell, will you be buying or selling your GLD or SLV?

We hear stories that physical is getting harder to procure. We should all just be paying attention to the premium in PHYS or the markup at reputable vendors. I fully expect that the paper gold and silver price to crash soon.

Mon, 01/24/2011 - 17:04 | 899996 tony bonn
tony bonn's picture

a breeze of fresh air...

krugman is a walking fucktard....the importance of capital to living standards cannot be over emphasized and it is destroyed through central planning because central planning is an artificial cop-out way of dealing with economic reality....it is also an insult to human intelligence and disrespect for human innovation...

artificial marginal price changes (including interest) - and in amerika they are often artificial - warp the value of capital. capital destruction is the single biggest economic problem facing america....see antal fekete for further elaboration.

Mon, 01/24/2011 - 17:08 | 900013 michigan independant
michigan independant's picture

http://www.usdebtclock.org/

Other than that, Metals is a safety device to you know what in history. The rest is in the long run there is no unpopular Government. The Consumer will decide.

 

Mon, 01/24/2011 - 17:12 | 900027 gwar5
gwar5's picture

Krugman is the one wearing the "Great Leap Backwards" shoe.

He will always be a Keynesian bitter clinger. Dogma is a bitch.

Inflation is how the rich steal money from the middle class.

Krugman is insisting on the Saudi Arabia of inflation to protect his ego.

 

 

Mon, 01/24/2011 - 17:35 | 900116 synthetic
synthetic's picture

Please, please, please let's just ignore this ignoramus...I understand Mr. Murphy's frustration and desire to retort, but if we simply ignore him, stop reading the NYT, and cripple their advertising revenue then maybe, just maybe, he will fade into the night.

Mon, 01/24/2011 - 17:47 | 900156 Kerel
Kerel's picture

Well done Mr. Murphy.  Mr. Krugman is not fit to shine your shoes.

Mon, 01/24/2011 - 17:54 | 900182 shortus cynicus
shortus cynicus's picture

Any dispute between Austrian Economics and Keynesian Ponzicomiks is not a serious one.

Austrians acts as some theoretical ancient gurus, and Keynesian are priests doing Gods work (if they loose, they just call Spanish Inquisition).

Austrian arguments are baseless without free market and sound money, try this:

... So all the households in the community begin saving 10 percent of their income....

Banksters don't need this savings, they may create credit out of thin air. Savings are a cost, not a gain, it's annoying thing from ancient times. Maestro liquidated any reserve requirements long ago and FED gives worldwide warranties in a case of bank run. All that counts is reckless spending, indebting, inflating, cheating and stealing.

As one bankster sad to me: if that all crushes, the system will be simply resetted.

My add-on: and if some country fail to deliver precious resources for fresh printed Ponzidollars, than stuxnet resets their power plants, this time permanently.

Mon, 01/24/2011 - 18:54 | 900440 Nootropic
Nootropic's picture

I will never understand how anyone can take Austrian economics seriously, when a central tenant is that thought experiments are more important than real world data (i.e. praxelogy).  The assretion that induction is somehow impossible here remaind nothing more than an assertion.

Mon, 01/24/2011 - 21:10 | 900988 Hey Assholes
Hey Assholes's picture

Perhaps you should acquaint yourself with logic.

 

Mon, 01/24/2011 - 21:23 | 901045 KickIce
KickIce's picture

Yep, because there's volumes upon volumes of text describing how nations have printed their way to prosperity.

Tue, 01/25/2011 - 05:08 | 901892 hugolp
hugolp's picture

I am an engineer and come from a family of chemists. All my life has been around science. Anyone that really understand what science is will see that keynesianism is totally unscientific.

Keynesians claim they are economists and scientist because they use empiric evidence to prove things. Well, let me tell you one thing, so do astrologers. It is not enough to use empiric evidence to become a scientist. Keynesians are nothing more than economic astrologers. REpeating around that they use data, without realizing they dont have a trustworthy scientific method.

If you understand how hard science work you understand that you need to be able to have a controlled environment and being able to repeat an experiment multiple times. In economics non of those exist, therefore showing data around is just bein an astrologer.

Social sciences demand a different method than hard science.

Mon, 01/24/2011 - 20:13 | 900756 emsolý
emsolý's picture

Whatever happened to that debate challenge?

Mon, 01/24/2011 - 23:53 | 901551 DrTAEdison
DrTAEdison's picture

@font-face { font-family: "Cambria Math"; }@font-face { font-family: "Cambria"; }p.MsoNormal, li.MsoNormal, div.MsoNormal { margin: 0in 0in 0.0001pt; font-size: 12pt; font-family: Cambria; }.MsoChpDefault { font-size: 10pt; font-family: Cambria; }div.WordSection1 { page: WordSection1; }

Isn’t it clear that neither the Austrian nor the Keynsian view is certainly right? 

 

When investment and consumption are artificially stimulated, the consequent restructuring might be good and they might be bad.  Sometimes the restructuring harms sustainable, pre-existing economic activities, causing investment to get ahead of itself, at the expense of maintaining sustainably profitable capital.  Other times, the artificially-stimulated investment opens up opportunities that never would have existed otherwise.  For example, if a massive fiscal/monetary expansion puts people to work building new roads, the net effect of the policy depends on 1) the usefulness of the roads in the future plus 2) the usefulness of the skills gained by the workers (the returns on the investment) minus the 3) loss of whatever the workers were doing before they were building roads, and 4) the cost of the paying them (the total cost of the investment). 

 

It could easily come out either way. 

Tue, 01/25/2011 - 06:04 | 901924 LudwigVon
LudwigVon's picture

Groundbreaking. Shat on.

Sign up to watch Murphy debate Krugman !!

http://tinyurl.com/48ne5k6

Tue, 01/25/2011 - 13:04 | 903085 alexwest
alexwest's picture

thats why i despise all those eco models/ theories..
it's all BS heres why...

##Consider a simple example that I use for undergraduates: Suppose the economy is in an initial equilibrium where households save 5 percent of their income

HEY STUPID YOU SHOUILD HAVE MODEL THAT RESEMBLE THE REAL LIFE , NOT YOU FUCKING FANTASIES ABOUT PEOPLE...

in real life ORDINARY PEOPLE ARE MOSTLY STUPID/LAZY AND GREEDY.. and thats why they dont have money, or in case of small ammount THEY WILL SPEND IN BLINK OF EYE..
ipad, iphonez, whorez,, etc

instead on building 'initial equilibrium' ask ordinary how much money do they save, how many of friends have at least 1 year of expenses in bank... i guess in best case 5-10% of your friends.

thats why we had s$l bubble, nasdaq bubble, hosuing bubble, and goverment bubble ..

rest my case
alx

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