Never Mind Their Distrust Of Data And Forecasts; Austrians Can Help You Predict The Economy

Tyler Durden's picture

Submitted by F.F.Wiley of Cyniconomics blog,

[O]f all the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself.
From The Economist, July 16, 2009.

It’s been five years since the The Economist magazine published the critical commentary  excerpted above. In hindsight, the noted reputational damage was neither lasting nor spectacular. As of today, we’d say it’s almost non-existent.

Mainstream economists continue to dominate their profession and wield huge influence on public policies. They merely needed to close ranks after the financial crisis and wait for people to forget that their key theories and models were wholly discredited.

Meanwhile, heterodox economists who stress credit market risks and financial fragilities – the Austrians, the Minskyites – remain stuck on the fringes of the field. It doesn’t much matter that the crisis validated their thinking.

There may be no better example of mainstream economists’ Machiavellian preservation of position than in the cadre of left-wing, Keynesian bloggers led by Paul Krugman. We say “led by Krugman” because he seems to set the tone and tactics that many of his cohorts mimic. If you happen to read a blog post that attacks ideological foes through a combination of ridicule, name-calling and false narratives – such as the absurd claim that all conservatives (alternatively, all Austrians) predicted rising inflation in recent years – it was probably inspired by Krugman.

Readers of this blog know that we would welcome a genuine shake-up in the field. Wouldn’t it be nice to have a Colonel Jessup moment – when the code of silence breaks and everyone finally knows the truth?

Lt. Kaffee: “Did you order the Code Red?”
Col. Jessup: “I did the job I…”

In other words: we want the impossible. Hollywood endings only happen in Hollywood studios. The real life Jessup would have denied the Code Red, smirked through his acquittal and caught the first flight back to Gitmo. He may have even felt the need to send a message to his troops by ordering another Code Red at the first opportunity. That’s pretty much what we’ve witnessed in the economics profession.

“Mythbusting” the theories of mainstream economists

Nonetheless, we’ll continue to explain why we think a shake-up is overdue. In prior posts, we demonstrated the risks of Keynesian fiscal policies using 200 years of government budget balances and 63 high debt episodes, and by working through the implausible arithmetic in Krugman’s debt reduction formula. More recently, we argued the Austrian/Minskyite position that bank lending is riskier than lending funded by prior savings, and also discussed many economists’ ignorance of the way that bank lending works.

We’ll tie the last two points together here, by taking a closer look at what happens when credit growth disconnects from naturally occurring (not through bank money creation) or “prior” savings.

This time, though, we look further back than the inception dates of the BEA’s National Income and Product Accounts (NIPA) and the Fed’s “flow of funds.” For debt, we include older Census Bureau data recorded in the Historical Statistics of the United States. With adjustments, we can show that the Census Bureau series tracks a similar “flow of funds” series fairly closely during the overlap:


We also look at pre-NIPA savings rates, calculated from data on disposable personal income and consumption:


The earlier savings rates don’t match NIPA exactly because: 1) they’re calculated from different surveys, and 2) they ignore personal interest and transfer payments, skewing the figures higher than they should be. In any case, true savings rates were surely low during the late 1920s – when both consumer credit and durable goods purchases were in bubble mode – and quite possibly even lower than the data in the chart.

Which brings us back to our reason for looking at history – to consider what happens when savings and credit run in opposite directions.  Here’s our answer:


Although there are only two episodes combining low savings with rapid credit growth, the outcomes couldn’t be clearer.

What’s more, quarterly data available from 1952 tells a similar story. With this more complete data set, we can cleanly separate total credit growth into two components:

  1. “Risky lending” financed by bank money creation or foreigners (as discussed in “3 Underappreciated Indicators to Guide You through a Debt-Saturated Economy.”)
  2. Lending from domestic, “non-money” savings (essentially prior savings).

Here’s the chart:


Risky lending tends to peak before lending from domestic, non-money savings, and also before recessions. In other words, once risky lending maxes out, the ensuing weakness feeds into the broader economy.

Moreover, the earlier chart running from the Great Depression to the global financial crisis adds a giant exclamation point to the post-WW2 results. It seems clear that risky lending is a key driver of the business cycle, while extreme differences between lending and savings lead to fully-fledged busts.

Needless to say, our conclusions aren’t exactly mainstream when it comes to economic theory. There’s no place in mainstream models for the idea that money-creating bank lending is any different to lending from prior savings. Nor is there a place for other fundamental features of credit booms, such as the malinvestment that deepens recessions or balance sheets that are unsustainably swollen with debt. Mainstream models don’t include balance sheets, after effects of malinvestment or even the very existence of banks!

To take the most basic steps towards understanding booms and busts, you need to venture outside the mainstream. The Austrian school, in particular, stresses key differences between money creation and lending from prior savings, matching the real world results in the charts above.

About the title

If you happen to show this post to your favorite Austrian economist, we wouldn’t be surprised if you’re told it’s too empirical. The Austrian school’s distrust of empirical research is well-defended by our friend Detlev Schlichter here, and we don’t completely disagree with him. But we do believe that many ideas in economics are reasonably refuted by observing real world happenings, while others are reasonably validated (though never proven). At least that’s how we see it, as you may have guessed from our content.

Think of the show Mythbusters, where all kinds of theories, rumors, adages, movie scenes and more are tested through experiments. While the experiments are often inconclusive, they’re informative enough for the presenters to make a judgment call – is the myth “busted” or not? We take essentially the same approach. Our experiments can’t be controlled, for obvious reasons, and this is the greatest limitation to empirical research in economics. Nonetheless, it shouldn’t prevent us from gleaning whatever information we can from history, and then considering what it tells us about the accuracy of economic theory.

Even Murray Rothbard, we might add in closing, made the occasional empirical argument.

Data sources and Q&A

See “Technical Notes for ‘Never Mind Their Distrust of Data and Forecasts…’.”

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gdiamond22's picture

Trade as a Keynesian, live as an Austrian (economically speaking that is)

Pladizow's picture

"While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit from such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting the case. And it will finally either convince the general public that the case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.” – Henry Hazlitt, Economics In One Lesson - Page one, 1946.

“It is often sadly remarked that the bad economist present their errors to the public better than the good economists present their truths.” - Henry Hazlitt, Economics In One Lesson, 1946.

Boris Alatovkrap's picture

Often is confusion of betterment of marketplace for citizenry and how to making money in marketplace at expense of citizenry. When Boris is watch CNBC, is often observe obnoxious commentor spout "but market is up, market is up" as proof economic is improvement. Boris is not argue market is not up, is not argue piece of excrement can making money in market, but economic is not healthy. Boris is only need observe how much wealth is creating by country, and how much wealth is wasting by government, to know economic is NOT improvement!

... but what is Boris know!?

economics9698's picture

Austrians do not control the Federal Reserve.  Can you predict the next Fed move, a $4.3 trillion move?

What is obvious to Austrians is we had a new monetary injection in November 2008.  About 5 years, give or take.

November 2008, 2009, 2010, 2011, 23012, 2013, and whalla Q1 2014 is negative 2.9 and the world is all of a sudden falling apart 7 months later.  We did not miss 2009, 2010, 2011, 2013, or 2013.  I personally told everyone that the Fed was using the false prosperity to print enough money to separate the political and economic elite from the peasant masses, and they did.  Never let a crisis go to waste.

It is not fucking rocket science.  Can the bubble continue?  Can the Fed print more?


The bubble has blown, the only question is will the Fed allow it to deflate or will inflation eat up paper gains, Germany 1923, stocks gained nominally but lost 33% in real terms.

Are we Venezuela, 1929, 1941, or do we really cut spending?

BuddyEffed's picture

This is just as good a place as any to recall these two classic music videos comparing Keynes and Hayek.  I've heard that it was a top notch production from the git go.

Keynes vs. Hayek Round One :

Keynes vs. Hayek Round Two :

MeelionDollerBogus's picture

I can predict it.

  1. print
  2. print
  3. print
  4. moar printing
  5. print

That was easy.

midtowng's picture

I used to listen to Austrian. But they completely missed the market from 2009-2013 and I was guilty of believing and passing on their opinions.

Until Austrian can admit and explain why they missed this call, then they've lost me.

booboo's picture

I don't think they missed the call, they underestimate the insanity of the MMT (Magic Money Tree or Modern Monetary Theory as they like to call it) retards or the depth of depravity that they would stoop to in order to be "proven correct". If you feel "guilty" you must therefore believe that the path they have chosen is the correct one and be willing to pay for cost of the misallocations and distortions without nary a word of complaint.

Boris Alatovkrap's picture

Smart Austrian is making money on market volatility while continuing recognition of market truths and holding fast to sound economic theory. Boris can look at reality and see how to benefit and same time as seeing why thing is so.

NOTaREALmerican's picture

Austrians focus on what SHOULD BE way too much.   It ends up being a moralistic guide to proper economic behavior, which is useless, as most people are duplicitous assholes when it comes to money.

Boris Alatovkrap's picture

Austrian is not focus or care for what SHOULD BE, but only causality. If understanding how economy is function, you are can make best decision free of ideological entrapment.

NOTaREALmerican's picture

That may be true of the Austrian "system" but the Austrian "priests" tend to be moralistic.   (as you'd expect of a priest).

NidStyles's picture

Yes, keep telling the world how other people think and behave to distract from your own inadequacies.

Boris Alatovkrap's picture

Boris is recommending of Vodka or Absinthe for distraction from inadequacy. Of course is risk also of distraction from everything important in life...

HardAssets's picture

@midtowng - your statement is unsound because it is too general and undefined.

What followers of the Austrian school of economics are you talking about ?  There are many people who say they adhere to that school that hold various opinions on various subjects. (Note that many people are called Austrians - who haven't actually studied the details of that school of thought in depth enough to be an economist. I've heard people make statements supportive of Austrian economics, while they didn't have an indepth knowledge of the subject.)

What specific 'their opinions' are you talking about ?

What do you mean by 'this call' ? 

One basic and foundational principle of the Austrian school is that central banks are responsible for creating asset bubbles through money printing. Central banks are the cause of the extreme business cycle.

But that doesn't mean they can predict where the Dow will be next month.

Ghordius's picture

 Empiricism is not a bad attitude, for itself. Medicine's greatest achievements were won through empirical methods. Yet real Austrians always warned of the folly of economic prediction, particularly when it's about timing

Augustus's picture

Experienced economist and not so experienced economist are walking down the road. They come across a pile of horse manure lying on the asphalt.


Experienced economist: “If you eat it I’ll give you $20,000!”

Not so experienced economist runs his optimization problem and figures out he’s better off eating it so he does and collects money.

Continuing along the same road they come across another pile of horse manure.
Not so experienced economist: “Now, if YOU eat this I’ll give YOU $20,000.”

After evaluating the proposal experienced economist eats it and collects the money.

They go on. The not so experienced economist starts thinking: “Listen, we both have the same amount of money we had before, but we both ate horse manure. I don’t see us being better off.”

The experienced economist replies “Well, that’s true, but you overlooked the fact that we’ve been just involved in $40,000 of trade.


Mempo of Twilight's picture

The problem with GDP is that it measures everything in life except what that makes life worth living.

joego1's picture

It doesn't even measure anything very well. Monkeys a the keyboard, bannas come out when they type the correct sequence.

macroeconomist's picture

Austrians can predict the economy? hahahhahahhahaha.

What a full load of bollocks...Where is the inflation? Don't try to go around the question, don't try to redefine inflation, don't come up with idiotic conspiracy theories that FED is misrepresenting the data, just answer straight:

Where is the fucking HYPERINFLATION?

Pheonyte's picture

Had a walk through the grocery aisles lately?

macroeconomist's picture

I am asking a very clear question, you've started dancing around it immediately. Monetary Base has tripled, FED has monetized ridiculuous amounts of government debt:



Not 2,3,5 or 10% inflation. I've lived through 70-80% annual inflation elsewhere in the world, I know how inflation looks like.

Where is the hyperinflation?

One must be proper faceless to claim that Austrians can predict the economy after what they've been calling for over 5 years has turned out to be utter nonsense.

Just look at those comments below mine. Still the same song "But Keynesian, Krugman, Socialism, bla bla bla bla."


NOTaREALmerican's picture

What is the stock market?

I'll take Survival of the Fittest for a bazillion, Alex...

(Actually, I agree with you that Austrian economics is as much an exersize in religion as Krugmanism)

economics9698's picture

Microeconomist when you put 12 million people out of a job it tends to keep inflation low.

macroeconomist's picture

Go on, let everyone know: The more negative votes for this post, the more inflation will go up :)

NidStyles's picture

Inflation all around the world as other countries do trade in USD. Your not very bright, or you're obviously politically motivated. 

tolivian's picture

You are confusing Monetarism (Friedman) with Austrian economics. Never a good idea with a snarky attitude. Learn your economics before bringing your snark.

macroeconomist's picture


perfect: I recommend you do a quick google search with the key words "zerohedge & Mises institute and hyperinflation",  and read the archives of of this blog and Mises Institute in the last 5 years.

So now you're calling your beloved friends here monetarists?

Some dignity please. Just some dignity...

NidStyles's picture

You realize those articles are mostly talking about actual Hyper-Inflations from history right? Economics is the study of history after all. 

headhunt's picture

The only reason we do not have hyperinflation is because the dollar is still the safest port in the world.

Paper money is a belief system, once people no longer believe 'Hello Zimbabwe'.

economessed's picture

Headhunt nailed it.  Inflation is too much "money" chasing too few goods.  Hyperinflation is a loss of confidence in the "money" that is used to acquire goods.

When there is no natural phenomenon of scarcity in money, hyperinflation renders it worthless.  Which brings to mind that nasty fact that gold has never been the source of hyperinflationary events.

ILLILLILLI's picture

The sole currency of fiat money systems...confidence.

macroeconomist's picture

How about Japan, which has monetized debt for over 20 years and has engaged in the biggest QE ever seen in history of capitalism? How about UK? How about Eurozone that has started a huge printing spree?

Japan is this, UK is that, US dollar is safe heaven, bla bla bla.

If you have a theory of something, and you defend it so fiercely, you will not come up with excuses for every case that disproves it. That is the standard reaction of neoclassical economics to every crisis they cannot predict. I recommend Austrians do not take the same path and genuinely think where the mistake is.

Lesson: Printing money, monetizing debt DOES NOT ALWAYS LEAD to inflation. And I will stress it once again. It does not ALWAYS lead to inflation. Economics is not that easy, capitalism is much more complicated than that. I am not saying it never leads to inflation, all I am saying is you need other conditions to be satisfied as well for that theory to hold.

NidStyles's picture

Only to the religiously bound are explanations of circumstances excuses.

macroeconomist's picture

hehhehehe. just like the Austrians, isn't it Nid? The ultimate religious cult blinded by the Randian philosophy of sociopathy. 

Keep it up, and let me know when your long awaited inflation finally comes. Rest assured, it will eventually come. If you predict something for 20 years in a row, you'll be right one day. 

NidStyles's picture

Look you have nothing but fallacies and insults to throw. Maybe in your circle of jerks that passes for intelligent discourse, but sorry it doesn't here. 


Your bias and Marxism is plainly obvious for all of us to see. 


PS, gas prices at the pump, up 40% in the last 6 months. Inflation is all around you and you are the sole blind person in the room. 


macroeconomist's picture

Look who is talking, the king of insults!! Have a quick look at the comments below, what percentage of the comments/posts on this website are merely insults to Keynes and Marx? And you still have the face to call me a jerk? Fantastic. Everyone here knows I like Marx, I have never hidden it. So don't think you've just uncovered a secret truth.

This blog entertains me so much. I recommend it to my students all the time so that they can see the true face of Austrians and what level of  libertarianism-masked sociopathy they will be facing if they fall into this trap.

Don't worry, if Austrians appreciate what I say one day, I will doubt my personal dignity.

TheRedScourge's picture

I have a theory that if you pour water into a pool, it will eventually overflow. It is not disproven merely because the pool is large or the water flow is relatively slow, or because you're first pouring the water into a reservoir that only drains into the pool once it itself becomes full.

JailBank's picture

For those 20 years Japan was an export nation. The US exports debt and paper that is about it.

Pheonyte's picture

A can of sardines, which cost .99 back in '06, is now 1.99. That's 100% inflation. Bread, the shitty nutritionless kind that used to cost .99 a loaf, is now 2.25, so there's 125% inflation. Hyper enough for you?

macroeconomist's picture

Clearly, Austrians need a lesson in maths.Excel would do the job for you.

From 2006 to 2014 --> 8 years

That is 8.5% annual inflation in sardines, and 9.5% annual inflation in bread. 


Pheonyte's picture

I'm not an Austrian dickwad, I'm someone who's sick of seeing my savings being eaten up by the shithead policies you endorse. And while we're at it, how about that 8.5% and 9.5% annual inflation is a zirp regime? Run that through your excel and see what happens to savers.

macroeconomist's picture

I have not said anywhere that I support QE, or lawless bank bailouts so this demagoguery will not work unfortunately...I have only asked a very simple question.

NOTaREALmerican's picture

Re;  Run that through your excel and see what happens to savers.

Savers wear many hats.   And, as the wisest of the wise bearded ones says:  Macroeconomics isn't a morality play.  There are winners and losers and if those with the best access to free government money win, well that's the price we pay to have an Economic model that works. 

And, for every down vote you've got to repeat the Keynesian Prayer of Perpetual Prosperity !

We must borrow more money,
To stimulate demand,
So that jobs are created,
And prosperity ensues,
Then we pay off our loans (unless we don't have enough prosperity, in which case, keep praying)

More Lint than Coin's picture

I don't really know if you are serious, but just in case.....

Inflation is an increase in money supply, not prices...rising prices are likely, but not necessarily going to happen.  The trend would say yes, sooooo where is the inflation you asked?

Let us begin with the fed balance sheet...was 900B, now 4.3T, excess reserves were 100B, now 2.6T...assuming that money is loaned at the current reserve rate of 4%....well now that might lead to rising prices.  The real question is where will the prices rise, u figure that out and we will make some FRN's.


note the 64% increase in debt (money) in the past 10 years.


I digress, you are right...I'm wrong

macroeconomist's picture

I put the disclaimer in my first post because I knew this Austrian nonsense of defining inflation as the increase in money supply would come up immediately: INFLATION IS THE INCREASE IN PRICES. PERIOD. I could not care less about your definition of inflation. 

When one does not really understand how the monetary system works and tries to learn it from Austrians, of course one will think bank lending has got something to do with the level of bank excess reserves. I recommend you read some correct economics

AMack's picture

Terrible article. How does the endogenous theory of money explain the impressive (non-bubble) economic growth periods preceding central banking? Of course, it doesn't.