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

Tyler Durden's picture

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

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

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

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 —

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

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

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.


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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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.

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.

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.

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?'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?

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'.'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.


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 ...


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.

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):

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.'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.

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 ...'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?

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.'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.

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.


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!'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.

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. 

Mark McGoldrick's picture

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

Mark McGoldrick's picture

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

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. 



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 ...


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.


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.


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.

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.

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. 

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.


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.






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.


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.


More Critical Thinking Wanted's picture

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

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:

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! :-)'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?



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.


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†

TruthInSunshine's picture

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

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?


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.




More Critical Thinking Wanted's picture



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.'s picture

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

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.'s picture

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