Austrian School of Economics

“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.”

Nathan Lewis proposes a "gold standard" which is not based on gold. He argues that since gold's only job is to regulate the quantity of paper, we can just tweak the policy of the Fed. Instead of buying bonds to control the rate of interest, they can buy bonds to control the gold price. This is like trying to steer a car by opening and closing the windows.

The Real Bill is quite different from the bond. It isn’t lending at all. It is a clearing instrument that allows the goods to move to the gold-paying consumer before said consumer pays with gold.

Salma Hayek is beautiful, rich and famous. Friedrich Hayek is a deceased Austrian economist. He wasn’t very good looking, certainly not wealthy but he did become famous – but only 20 years after his death and then only within the make believe world of nerdy economists. Fortunately for the World today, if we are lucky, Friedrich Hayek may become the most famous Hayek of them all. Until then, the World remains firmly trapped in an economic hell created by Friedrich’s (and therefore Salma’s) arch enemy – John Maynard Keynes. IceCap's Keith Dicker points out that, as most politicians and central bankers view the World in very short time frames, to truly understand the devastation wreaked by Keynesian economics, one has to take a step back and see how the financial destruction accumulated over time. It is true that these policies initially provided sugar highs for the economy – but the 3 step cycle of cutting interest rates, cutting taxes and borrowing money to create growth has finally reached its end point. If Mr. Keynes was alive today, we are confident he would be embarrassed that his lifelong work had been so severely distorted.

Rand Hated Libertarians ... and Many Libertarians Despise Rand

A free market is composed of people who produce and trade the products of their efforts in exchange for the products of others. The free market is able to coordinate the activities of everyone, and enable everyone to optimize his results. Unfortunately, governments interfere in the free market. They do so by the use of force. The government always justifies its intrusions on the grounds of helping people. Government officials and voters are not aware of the lessons of Frederic Bastiat. The attempt of all to live at the expense of all is doomed. There ain’t no such thing as a free lunch. Rather than helping people, the government’s interference inevitably causes distortion. As destructive as government interference is in the area of production, it is that much worse in the area of money and credit. Every aspect of production and trade depends on money, so distortions in this area are magnified. Unfortunately, the government has distorted the monetary system so badly that both are accelerating towards destruction. The solution, and the only hope for civilization, is to rediscover the principles of free markets, particularly on the monetary realm, and begin returning to a gold standard.

It’s easy to be pessimistic over the future prospects of liberty when major industrialized nations around the world are becoming increasingly rife with market intervention, police aggression, and fallacious economic reasoning.  The laissez faire ideal of a society where people should be allowed to flourish without the coercive impositions of the state is all but missing from mainstream debate.  In editorial pages and televised roundtable discussions, a government policy of “hands off” is now an unspeakable option.  It is presumed that lawmakers must step up to “do something” for the good of the people.  Thankfully, this deliberate false choice will slowly but surely bring the death of itself.   Illogical theories can only go on for so long before the push-back becomes too much to handle.  For those who desire liberty, it’s a joy that the statist economic policies of the Keynesians become even more irrational as the Great Recession drags on. The two following examples will illustrate this point.

What is high-frequency trading? We will never exhaustively address this issue here. We recommend that you do your own research on the subject. There are numerous articles on this topic. High-frequency trading (HFT) consists in using sophisticated technology to trade securities. It is highly quantitative, employing algorithms to analyze incoming market data. HF investment positions are held only very briefly, with HF traders trading in and out of positions intraday tens of thousands of times. The important feature is that at the end of a trading day there is no net investment position. Processing speed and access to the exchanges are critical.

To some, Paul’s stubborn persistence in the campaign has been just that: a stubborn unwillingness to lie down and die despite evidence of sure defeat. But what they have missed is a common misperception of a subtle yet powerful age-old strategy at play - the archetypal shi (pronounced “sure”) strategy expounded and employed by Chinese philosophers and military strategists for thousands of years. More than anything else, we can see Paul’s greatest shi advantage in his outsized support among the young. In this society of immediate gratification and winning right now at all cost we need to ask ourselves: why should future elections and platforms matter so much less than the current ones? There are powerful cognitive biases at work - among them the temporal myopia of hyperbolic discounting, or excessively undervaluing the future, while focusing on the nearer term - which make fuzzy in our minds the importance of victories in the years ahead (a view that is promulgated by the media). The ultimate war is against intrusive, burgeoning government, in the ongoing insurgencies of the battles yet to come—Ron Paul’s grand shi strategy.

Erste Group's Ronald Stoeferle, author of the critical "In gold we trust" report (2011 edition here) has just released the 6th annual edition of this all encompassing report which covers every aspect of the gold space. What follows are 120 pages of fundamental information which are a must read for anyone interested in the yellow metal. From the report:  "The foundation for new all-time-highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Skepticism, fear, and panic are never the final stop of a bull market. In the short run, seasonality seems to argue in favor of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side."

What is a black swan event, or tail event, in the stock market?

- It depends on who’s asking.

- To those familiar with Austrian capital theory, the impending U.S. stock market plunge (of even well over 40%)—like pretty much all that came before in the past century—will certainly  not be a Black Swan, nor even a tail event.
- Nonetheless, the black swan notion is paramount—in perception: Market participants’ failure to expect a perfectly expected event—that is, they price in only Anglo swans despite the  Viennese bird lurking conspicuously in the weeds—much like what is happening today, brings tremendous opportunity.

History shows that freedom is almost always the price that societies pay to maintain the status quo and keep their rulers in power. When the system finally collapses under its own weight, though, things can go from bad to worse as the people cry out for CHANGE. The French, for example, traded an absolute monarch in Louis XVI for an absolute dictator in Robespierre. Similarly, the Russians traded the empire of ‘Bloody’ Tsar Nicholas II for the Red Terror of Soviet Russia. As the Russian Marxist revolutionary Leon Trotsky said in 1937, “The old principle of ‘who does not work shall not eat’ has been replaced by a new one– who does not obey shall not eat.”

Two words: Screw that.

Forget Competing Theories … What Do the Facts Say about Quantitative Easing?

The symbiosis between the Keynesian expansion of the economy and the growth of suburbs in US cities has been ably discussed by Beauregard (2006). Sprawl was driven by the flow of money, the "American dream" of owning a home in the suburbs, and facilitated by the widespread ownership of cars. The suburbs were designed with cars in mind. The growth of suburbs fulfilled two roles. Lots of houses were available for new buyers, which kept prices down; and city governments discovered that developer's fees and the new land taxes initially exceeded the maintenance cost of the new roads and infrastructure built to support them,. Unfortunately, as time passed and the infrastructure aged, soon maintenance costs exceeded tax revenues, necessitating another round of growth. Suburbs were able to maintain the required level of growth for a few decades, but we are reaching the point everywhere (it seems) where there cannot be enough new growth to maintain our crumbling infrastructure. The mindset of the "ownership society" really drove demand for housing, and the best places to expand were in the southwest, so that cities like Phoenix and Las Vegas really grew. Low interest rates plus easy money led to a bubble in house prices and an explosion of sprawl. The Austrian school of economics teaches us that easy money leads to malinvestment. Suburban growth certainly seems to qualify. Our urban sprawl malinvestment has left us with the interwoven problems of unlivable cities, financial crisis, and increased death and destruction from natural disasters.

Unlike under a gold standard, in paper money the rate of interest is subject to massive volatility. Sometimes, the government has its way, fueling rising prices and interest rates. Other times bond speculators front-run the central bank’s unlimited appetite for purchasing government bonds and the rate of interest falls. We are now in year 31 (so far) of this latter phase. As the total accumulated debt increases (feature #450 of irredeemable money is that total debt cannot go down), the effect of a change in the rate of interest becomes larger and larger. Today, even very small fluctuations have a disproportionate impact on the burden of debt incurred at every level, from consumer to business to corporate to government at every level. To say that this is destructive is a great understatement. This, rather than the quantity of money, is what people and especially economists should be focused on.