"Economic" Advice To The President (Laissez-Faire Austrian Vs. Anti-Market Keynesian)

Tyler Durden's picture

Submitted by Alasdair Macleod via The Cobden Centre,

Your country faces a stagnating economy. Let us assume your Prime Minister (or President if that is who holds the executive power) seeks advice from two imaginary economists.

PM: You two economists have different views on what our economic policy should be. What is your advice?

FIRST ECONOMIST (Austrian school): Prime Minister, the reason we face a stagnant economy is your central bank perpetuated the credit cycle by suppressing interest rates when the economy turned down after the banking crisis and lending risk escalated. That has left us with a legacy of under-performing businesses, which should have been left to go bankrupt. Instead they are struggling under a burden of unrepayable debt. Capital is not being reallocated to the new enterprises of the future. The dynamism of free markets has been throttled.

The extra money and credit created by the banking system has not been applied to the real economy. Instead they are fuelling a financial boom in asset prices, which have become dangerously separated from production values.

 

Eventually, current monetary policy will lead to a fall in the purchasing power of the currency, and the central bank will be forced to raise interest rates to a level that will precipitate the next financial crisis, if the crisis has not already occurred by then. Overvalued assets become exposed to debt liquidation. It happens every time, and if you think the last crisis, which led to the Lehman collapse was bad, on current monetary policies the next one will be much worse, just as Lehman was much worse than the aftermath of the dot-com boom.

 

A monetary policy that relies on the transfer of wealth from savers to debtors always fails in the end, as certainly as death and taxes exist. It is also the real reason the bankers are getting wealthy while ordinary people become poorer. The time has come to recognise that your central bank, by licencing and encouraging the banks to create credit out of thin air, is the source of the problem.

 

Sadly, your central bank seems blissfully unaware of the debilitating effect of monetary inflation on your voters’ wages and savings, and if I may say so Prime Minister, your administration pays little regard to the natural injustice of rewarding profligate borrowing and penalising thrift.

 

I advise you to stop your central bank from manipulating interest rates and to let the markets sort themselves out. Furthermore your central bank must stop debasing the currency as a cure-all. So this is what I suggest.

 

First, encourage savers to rebuild their wealth directly through tax policy. When someone has paid tax on his income he should be entitled to keep his savings. The evidence from Germany and Japan in the post-war years is that a stable source of low-taxed savings is a prerequisite for a strong, yet stable, economy. And as savers rebuild their personal wealth, the state can scale back its future welfare commitments, which as you must be aware, are in danger of escalating out of control.

 

Second, I would reform the financial system. Banks should manage their affairs on the basis of reputation, and not hide behind regulation. Instead of looking after their customers, they use their regulated status to game the system. Regulating the banks has led to crony capitalism of the most pernicious sort. In future banks must set their own standards and be answerable to their customers first and foremost, not to a government regulator.

 

Third, the state must always run a budget surplus, to pay down its high level of debt. In balancing the books it is important to bear in mind that money taken in taxes destroys wealth. For a truly prosperous economy, you should plan in the longer term to reduce the state’s tax take to below 30% of GDP, and lower still in the fullness of time.

 

You will only put a stop to successively worsening cycles of boom-and-bust in the future if you return to sound money, free markets and small government. Your ministers must stop pretending they can run the economy. They have no basis for making commercial judgements. Government interventions are always politically-driven. Nor should your ministers listen to big business, which always seeks to influence policy in its favour.

 

I realise all this will take time to implement and must be done in steps so that the private sector can adjust. For this reason I recommend you structure these changes over a ten year period, announcing the legislative schedule in advance. You will find that businesses will reposition themselves to your new policies ahead of their implementation. The benefits to your economy and your voters are more likely to flow smoothly without disruption, and deliver economic benefits much sooner than you think.

SECOND ECONOMIST (Neo-Keynesian): Prime Minister, I cannot believe what we have heard from my esteemed colleague. He lives in a world that no longer exists. I really don’t see the relevance of nineteenth century values to the economic conditions of today. The disciplines of macroeconomics and econometrics have made great advances, allowing us to plan the course for the economy in greater detail than before.

I am confident that I have the solution to your problem. I firmly believe that your government’s monetary and economic policies are going in the right direction, but you are not bold enough. People are too reluctant to spend, so you must do everything to encourage them to do so, perhaps forcing the banks to cut the cost of consumer credit. Alternatively, you should explore means of distributing extra money to consumers through government spending, along with negative interest rates perhaps, to jump-start economic growth.

 

I am convinced your government can safely increase its budget deficit, injecting money into the economy by creating more jobs in the public sector. You should bring forward spending on infrastructure, which will boost the construction industries. Creating employment by expansionary measures will reduce the cost of unemployment, offsetting some of the budget deficit.

 

Prime Minister, it would be a huge mistake to cut back now, because the result will certainly be a deepening recession, widespread bankruptcies and increasing unemployment. I am convinced that with government support, the welfare state and vital industries can be safe-guarded, and if your central bank increases the money supply further and encourages the banks to lend we shall get through this temporary problem. It’s vital we get consumer confidence going again, and I firmly believe progressive economic and monetary policies can save the day.

 

The time to cut back is not now. When the economy resumes its long-term sustainable growth trend, increasing tax revenues will then close the deficit, bringing government finances back into balance. There really is no need for any cuts in public spending, which will only lead to disaster.

********

I have presented both arguments unadorned with any compromises, but they capture the essence of the chasm between the laissez-faire Austrians and the anti-market neo-Keynesians. The difference between the two is the Austrian argues from a sound theoretical basis, while the Keynesian approach is founded on beliefs and a reluctance to consider second-order effects.

It should be apparent that a politician driven by short-term considerations, which describes just about every leader in Western democracies, will have great difficulty in dealing with the destructive credit cycle. For a start, they all claim that their central banks are independent, which is code for “we don’t understand monetary policy, so we don’t want to be responsible for it.”

This is why the order of events is crisis first, solution second. The solution is always to address the symptoms and not the underlying problem. It is not for nothing that everyone refers to the Lehman crisis as if it was the crisis. No, the crisis was the over-inflation of asset prices relative to their productive capacity, and the speculative greed that drove it. Lehman, AIG, Bear Stearns and all the rest were merely the subsequent casualties.

Very few people understand the fundamental truth that in properly functioning markets, assets are valued by their productive capacity: property yields a rent, or the equivalent use-value for an owner-occupier. Machinery produces manufactured goods, and the value of the goods produced determines the value of the machinery. Even art produces a return in aesthetic value, hard though that is to value. But when speculation drives values for values’ sake, as was the case with the dot-coms and the liar-loan property boom seven years later, a financial crisis always follows. Yet again, this description fits the conditions of today.

The only time asset values can continue to rise on a non-speculative basis is when the public as a whole changes its preference against money and in favour of goods. In this instance it is the purchasing power of money falling, and not the value of goods rising. This does not apply today, as the price of gold attests. However, it is likely to apply when the central banks react to the coming crisis.

The truth is it is too late for our politicians to act, because the speculative peak that precedes the crisis is already upon us. Last time round, the Federal Reserve Board wrote open-ended cheques to save the banking system, estimated at the time to be as much as $13 trillion or thereabouts, though not all this facility was drawn down. It followed this with zero interest rates and three rounds of quantitative easing. What will it take this time?

Whatever it takes, as Mario Draghi famously said in 2012. This time it will almost certainly be currencies that end up taking the hit.

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Latina Lover's picture

The only advice I would offer to the President is to go back to Chicago,  to your gay bath houses, and leave the rest of us alone!

PS take Michael/Michelle with you, please.  Ask Hitlery to join, she would enjoy it, and could teach you a thing or 2 when it comes to licking penis/pussy.

 

 

The Pope's picture

 "Ecnomic" Advice To The President"

 

Just fucking DIE bitch & pretend it WASN'T on your watch.

 

As your reward (for your PEACE PRIZE worthy efforts & contributions) ~ Get your stupid, 3 PUTTING FROM THE ROUGH, skinny @ss re-incarnated as the NEXT slave bitch strapped to the whipping pole

SmokinMonkey's picture

Looks like the Baltic Dry Index just collapsed to a record low of 498 ..  http://www.bloomberg.com/quote/BDIY:IND

Boris Alatovkrap's picture

<-- Von Mises

<-- Keynes

is truly understand eonomic and secondary effect.

Monetas's picture
Monetas (not verified) Latina Lover Nov 21, 2015 2:49 PM

You made me cum .... I had to up vote you ?

Dragon HAwk's picture

If Government spending  is good for the Economy, Why doesn't the government just pay everyone  1000 dollars an hour to dig holes in the ground?

Dick Buttkiss's picture

Why bother with digging holes?

razorthin's picture

To the very heart.  Thank you!

And, why bother being source of capital for business?

robobbob's picture

even keynsians know you have to get some value for your spending. think of all the shovel and work-glove maker multipliers.

Stuck on Zero's picture

Why not pay them to break windows?

stopthejunk1's picture

They will pay us to play games.  Probably, augmented reality games, so that we have to run around in the streets rather than just sit on couches.

And all visible signs of the continuing massive inequality will also be removed -- via augmented reality.  Your Occulus contact lenses will filter out the sight of the uber-rich, who will be living in nanocrystal towers in the sky.

Date of advent: sometime around 2150.

nuinut's picture

…eventually, they will pay us for our gold.

 

(And in doing so will have addressed the problem, in addition to the symptoms).

Dick Buttkiss's picture

Milton Friedman once visited a road-building project in India, where thousands of workers with shovels were used instead of much more production heavy machinery. Asking the government official escorting him why, the official replied, "This creates more jobs," to which Friedman replied, "Then why not use spoons?"

stopthejunk1's picture

We will get there eventually.

Try to imagine what the world will be like in 200 years, when structural unemployment is at 90% because the entire economy is automated.  Think AI, etc.

The challenge now is to imagine how an economy could work when no one has a job, but there are still enough goods produced to meet any and all demand.

What happens when capitalism perfects itself so that it does not require labor at all? 

Betcha don't have an answer for that.  Economists ought to think about that, rather than about inflation or "debt," because the problem I describe is real, not imaginary, and cannot be "spreadsheeted" out of existence using the trick top-hat mathematics that economists make their livings by.

Dick Buttkiss's picture

In 200 years, humans will be history . . . to be heralded, however, for what we will have created at least 150 years earlier:

http://marshallbrain.com/second-intelligent-species.htm

INTJ Economist's picture

Because of inflation, you stupid fuck.  Have you actually read The General Theory?  Have you read Lerner?  Have you read Minsky?  

fudge's picture

I would like to live on a planet without economists.

razorthin's picture

Who is the troll who 1 starred this article?

Gatos Locos's picture
Gatos Locos (not verified) razorthin Nov 21, 2015 1:26 PM

Janet Yellen?

Lorca&#039;s Novena's picture

Nothing will ever happen until the socialist fucking scum are removed alive or dead from government.

stopthejunk1's picture

There is no such thing as a "sound theoretical basis" in economics.

This is the problem with economists -- and with their fanboys like whoever wrote this article. They think that economics is science. 

It isn't. It's more like a cross between psychology and sociology.  In other words, pure guesswork. 

Also, the real problem facing society isn't debt (which no one can see) or inflation (which almost no one can see) but inequality.  Every conflict in the modern age has had massive inequality as a primary motivating factor.  Debt or inflation are always secondary, and almost irrelevant by comparison.

Of course, saying so is "socialism"... so, you know, it must not be true. 

Capitalism: property matters more than people.

Socialism: people matter more than property.

It's that simple.

razorthin's picture

Actually, Austrian "economics" recognizes economics as a pseudo-science, and relegates itself to clarion for that truth.

stopthejunk1's picture

If Austrians understand that all economic theories are horse shit, why do they bother to construct one themselves?  Especially one that is so obviously simplistic.

The writer claims that Austrian economics has a "sound theoretical basis."  There's no such thing, outside of science.  So either his description is erroneous or the Austrians are mountebanks like everyone else.  I believe it's the latter, because I have read enough of the Austrian school to know that they do believe they have found "the truth," even though there is no such thing.

It's like comparing Judaism and Islam, and claiming that Judaism has a "sound theoretical basis."  There are no testable theses in economics.  Therefore it is not scientific.  Therefore it has no rational basis at all, especially not a "sound, theoretical" one.

 

Stuck on Zero's picture

Here is a sound theoretical basis for Austrian economics: "The wisdom of the many exceeds the wisdom of the few."

 

stopthejunk1's picture

AKA mob rule?

AKA pure democracy...

I have to disagree.  There's nothing specail about "the many."  They're the same as "the few," except they're a lot poorer.  If they had the power & money, they'd behave in the same egregious way.

I'd say there's not a lot of "wisdom" going around in either group.

Billy the Poet's picture

No. A free market in which everyone "votes" with their productivity and with their money. When real people support the industries they desire the most sustainable economy emerges. When central planners push money here and pull money from there they create malinvestments in industries which are not actually desired by real people and are therefore unsustainable.

dhemaius's picture

Wisdom like in common sense? Not so common nor sensical afterwards. Wisdom is far from any "sound theoretical basis".

 

"Your wisdom is consumed in confidence"

GreatUncle's picture

Keynsian policies only work if an individual has an excess to invest into the economic system to keep up.

Elites like this policy with always an excess, they reinvest far more and actually outstrip the normal person.

That is your inequality gap and how it came to be and it is how they designed the system, growth 2%, I obtain a growth of 2.5% and on a long enough timeline I own everything which is where we are now.

Debt is for the poorest no way to get out because they have no excess.

Inflation is for the middle class seeing their worth falling to the poorest.

Elites, is no debt, inflation means nothing and the easy life.

One of the reason elites will never let this kind of mechanism die, it is just to dam good for them.

stopthejunk1's picture

Yes, that is true -- and it's true under any economic system.

The elites do not need fancy theories or mathematics for their predations.  Their actions are instinctual, built into human nature, and they will always find a way to perpetuate inequality. 

The Bible got it half right with "the love of money is the root of all evil."  The full truth is: "the love of having more money than the next man is the root of all evil."

This is why the answer is not a change in economic theories, but a change in values.  The rich will never change their values.  It's easier for a camel to pass through the eye of a needle. 

I believe we will continue to have massive and worsening inequality until we are governed by intelligences that are non-human.  This could be either AI, or AI-augmented human beings.  Unfortunately we probably have a couple more centuries of misery until it is technologically feasible to change our own natures -- to overcome our own evolutionary programming via technology, similar to gene-editing. 

At that point we will have become post-economic man, and not homo sapiens at all.  And at that point we will be civilized enough to be allowed to conduct interstellar or intergalactic travel... "allowed" by the extraterrestrial races that must be absolutely mortified by our current conditions and behavior, and so keep us quarantined on Earth like the social disease that we are.  They may even be actively stymieing our science to prevent us from getting off the planet.  I know I would, if I were them.

To bring this full circle: Jesus was an extraterrestrial AND a socialist.  All aliens are socialists.  No society that fails to evolve beyond the barbarisms of "competetitve markets" ever achieves escape velocity.

Usurious's picture
Usurious (not verified) stopthejunk1 Nov 21, 2015 1:51 PM

USURY is the root of all evil.............

Chris88's picture

Who determines what "usury" is?  Mommy government?

certified for silver's picture

Not that I'm a theologian but I'm fairly confidant that Jesus was not a proponent of the coercion and force used by the state to extract the fruits of effort and ingenuity from the productive segment of the world and redistribute it to those who refuse to DO for themselves... yeah charity kindness and selfless giving sure but definitely not via force.

Chris88's picture

Keynesianism:  Taking water from the deep end of the pool, running to the shallow end while spilling it all over the outside of the pool, then dumping it in the shallow end and claimining the water level has now risen.  

GreatUncle's picture

The real problem in trying to attempt a different fiscal direction you have to have debt forgiveness to start again.

Any move to a sound fiscal policy while being forced to support an enormous amount of bad debt puts you into stagnation just as if you had carried on in the same direction. The Keynesian game was a one trick pony of debt pretending it all added up until the debt maxed relative to income after that you grind the economy into a stagnant position.

One way out, would be brutal and should have happened in 2009 all bad debt bankrupt, all holders of this debt you lost! At that point tomorrow is another day and everybody can start trying to build a future once again. currently as I see it the system is trying to offload this bad debt onto the population before they do this because they do not want to lose. It really is that simple.

We should never have let the economists allow this debt through Keynesian policies and definitely not allowed it to grow past serviceability requiring QE and ZIRP, soon to be NIRP to support it.

 

 

SamEyeAm's picture

"Mr. President" isn't listening. Economics don't interest him.

There are happier topics like stirring racial tension, fundraising for the DNC and babbling on about manmade climate change to guilt people into redistribution.

Hohum's picture

While you are dispensing advice, you might also want to include recommendations for increasing society's net energy.  Don't think Von Mises tackled that one.

gcjohns1971's picture

To rebound from a currency crisis currency issuers must have collateral whose value relative to other goods does not depend on the currency in crisis.

Counter-party free monetary assets must be allowed to float BEFORE the crisis, or they will not be available to underpin the new currency.

Batman11's picture

Everyone works in their own interest even economists.

Malthus – supports the vested interests of landlords and so finds nothing wrong with parasitic landlord rent extraction.

Ricardo – supports the vested interest of bankers coming from a banking family, sees problem with feudal landowners but not bankers that create money out of nothing

The Austrian School – Austrian aristocrats, of the European Leisure class, support investor’s interests. Anti-Government as they are trying to do away with the old European aristocracy. Give preference to those with money:

You are free to spend your money as you choose.

No money, no freedom.

Money is freedom.

Most classical economists differentiated between earned and unearned wealth.

The Austrian Aristocrats benefit from inherited wealth and hide the distinction.

Hidden quote from the right wing hero, Adam Smith, who recognised the dignity of labour and the idleness of the rich.

Adam Smith:

“The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

 

Sudden Debt's picture

We are ruled by political correct morons who only adress a problem after it happened as they lack the interest of foresight.

There's simply to many populists to make a change that matters.

 

Look to europe, every political party was against anything that could be concidered rascist because it was a popular thing so they let everything happen.

Now, suddenly, right wing movements are becomming very popular and every politicians agrees to the measures against the muslims.

Now suddenly they

 Realise that it's actually in the koran to lie against an infidel when you're at war with them and that non should be believed if they talk easing words.

You still won't see things like the counsil of Imans in europe where 5 where against the violence and hundreds cheered. It shows the entire muslim community is rallying against the west and we're to stupid to see it as we have been brainwashed by the disney channel to believe that every story has a happy ending.

 

gregga777's picture

The US Federal Reserve was designed by the banking parasites and enacted into law by the political parasites in the White House and Congress to do one thing: transfer Main Street wealth to Wall Street parasites. Make no doubt about it, the political parasites know this for a fact because they routinely receive their two bits compensation—I mean, bribes—from the Wall Street parasites. How do you think the Clinton's left the Ehite House broke yet are now worth between $100 million and $200 million? For their scintillating speeches containing unique insights about defending our Constitutional Republic?

Bossman1967's picture

As I read this at the end I spoke to my wife as a business owner and am thankfull I am awake and realise whats comming I am out of this fiat system, we have everything we need for the worst thats comming and can buy into the next system if its worth buying into and if not I am outta here. Get ready in 3 2 1 boom

THE DORK OF CORK's picture

 Both schools of "Thinking" is rubbish.

Both accept the monopoly of credit and go against the teaching of Jesus and his war against the Pharieses.

The time value of money is a human construct and not a physical reality.

As for the the Keynesians forcing people to work for purchasing power  in the age of machines is extremely wasteful ( it is designed that way to maintain wealth Concentration)

THE DORK OF CORK's picture

 The objective of life is to live, to have enough goods and time units to free yourself for spiritual and intellectual endeavours. 

 

 

It is not to save.....we first began saving when we switched to a agricultural way of life.

We save out of necessity during the autumn period.

To much saving and the food is likely to become spoiled and therefore this leads to wasted effort compromising the first objective of life.

Too little savings and you are likely to starve during hard times.

 

The large saving's (Debt) of both the Austrian and Keynesian school point to a needless saving.

In the modern world we can witness this as increased friction or distribution costs relative to the entire economy .

This Mc fellow wants to banish us all to the 4th circle of Hell where the misers ask each other "why save,  Why waste"

Batman11's picture

"In future banks must set their own standards and be answerable to their customers first and foremost, not to a government regulator."

Banks produce accounts that are so opaque that even other banks don't know the true situation, hence the credit crunch, when banks don't lend to each other as they don't know the good banks from the bad.

We de-regulated banks and trusted bankers and they rigged every market they could.

We removed the 1930s legislation designed to prevent another 1929 and they did it again in 2008.

We can thank the bankers for reminding us of the necessity of legislation and why it was enacted in the first place.

There is lots of financial regulation because bankers are incompetent, unscrupulous and entirely without morals.

 

Demdere's picture

Folks.  You are arguing theory wrt all this, not epistemology wrt economics' intellectual foundation : No experiments are possible, therefore no cause and effect and definitely not a science.  Only correlation information to build models with, so the same intellectual class as history, information about the past used to predict the future.  That is not zip, but can never be engineering.

The Keynesian model is too simple, has never worked.  We knew that before this last experiment in the Western world, but the CB's like the power and the politicians use the created fiat to purchase votes, MSM sells anything as instructed, and the critical 5% of critical voters was bought off with created $.

https://thinkpatriot.wordpress.com/2015/08/10/a-modern-approach-to-secur...

 

Monetas's picture
Monetas (not verified) Nov 21, 2015 2:39 PM

Natural panics are short lived .... serve to reward better economic stewardship .... and punish poor economic husbandry .... they are an important reset .... and should not be interefered with ?

Billy the Poet's picture

Correct.

But you got your TARP anyway so why complain?

Monetas's picture
Monetas (not verified) Nov 21, 2015 2:43 PM

The slightest deviation from Capitalist orthodoxy is criminal !