The Great Unraveling Looms - Blame The 'Austrians'?
Submitted by Alasdair Macleod via GoldMoney.com,
Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain's Adam Smith Institute publishes a paper by Anthony Evans that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.
Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.
The Adam Smith Institute's paper is not so shy, and includes both "sound money" and "Austrian" in the title, though the first comment on the web version of the press release says talking about "Austrian" proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans's paper.
The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers' central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed's new policy of raising interest rates was influenced by the BIS's view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.
These are straws in the wind perhaps, but surely central bankers are now beginning to suspect that conventional monetary policy is not all it's cracked up to be. For a possible alternative they could turn to the article by Anthony Evans, published by the Adam Smith Institute. Their hearts will sink, because Evans makes it clear that central banks are best as minimal operations, supplying money through open market operations (OMOs) on a punitive instead of a liberal basis. Instead of targeting inflation, Evans recommends targeting nominal GDP. Evans's approach is deliberately sound-money-light, on the basis that it is more likely to be accepted than a raw sound-money approach. But he does hold out the hope it will be an interim measure towards sound money proper: initially a Hayekian rather than a Misesian approach.
Targeting nominal GDP is not a perfect answer. As Evans points out, changes in government spending distort it, and by targeting output, there may be less control over inflation, if control was ever the right word. However, my own researches are generally supportive of Evans's approach to managing the money supply. This is because, logically, nominal GDP, which is impossible to measure accurately by the way, is simply the total amount of money deployed in the part of the economy included in GDP. The reason this must be so is Say's law, the law of the markets, tells us that we produce to consume, and production is balanced by the sum of consumption and savings. Therefore, if new money or bank credit is introduced into the economy, it will temporarily increase both demand and supply for goods, until the spread of rising prices for the goods affected negates the impact.
In managing the total money supply, a central bank would have to take into account fluctuations in bank credit, and adjust its own operations accordingly. No MPC, no FOMC, and no convoluted analysis of inflation prospects are required. The true Austrian approach is to welcome a corrective crisis as the most efficient and rapid way to unwind malinvestments. Nominal GDP targeting of a few per cent can be expected to soften this process without unduly discouraging it.
While I support the concept of targeting nominal GDP, Evans's paper is necessarily complicated, written for an audience that denies Say's law. He argues his case on a modified equation of exchange, M+V = P+Y, where M is the growth rate of the money supply, V is the change in its velocity, P is the inflation rate, and Y is the growth rate of output.
My worry is that the faintest suggestion of sound money policies will be blamed for a developing economic crisis, without being adopted at all. Within one month of the Fed raising the Fed Funds rate by a miniscule 0.25%, it seems the whole world is falling apart. The usual market cheerleaders are now on record of expecting a global crisis to develop, the signs being too obvious to ignore. Markets are over-valued relative to deteriorating economic prospects. Collapsed energy and commodity prices tell their own story. Shipping rates and the share prices of US utilities (including rails and freight) are falling. The days of blaming China for a contraction of world trade are over: the downturn is now far larger and more widespread.
Decades of accumulated market distortions appear to be on the brink of a great unwind, most of which can be blamed on expansionary monetary policies. If so, the banking crisis of 2008 was a prelude, rather than the crisis itself. The Fed will almost certainly reduce interest rates back to zero, and reluctantly will have to consider imposing negative rates.
The Keynesians will blame the Fed for a complete policy failure. They will argue in retrospect, as they did following the banking crisis, that the financial and economic crisis of 2016 was made immeasurably worse by the Fed raising the Fed funds rate and not pumping yet more money into the economy at such a crucial time. It's like saying alcoholics must drink more to be cured. The monetarists will simply say that the Fed got it wrong, and that monetarism was not to blame. They will both blame advocates of inflexible sound money.
The reality is, that by implementing conventional policies on the recommendation of group-thinking macroeconomists, the central banks have dug a hole too deep to escape. Recognition of the merits of Austrian sound money theory will simply expose this reality sooner than later.
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Wrong. Money is the mechanism which maintains equilibrium in a market. Debt = Credit. Credit = unstable money. Money must be tied to tangible reality because money is a facsimilie for barter. Credit destroys this link by not only detaching from reality, but compounding itself when debt comes due. All of the problems in the world can be reduced to The State coersing the populous to operate with "money" that is no way attached to reality.
We need to END THE FED. We need to SMASH THE STATE. Yes, even if it means entering a decade or two of "dark times" as the world economy readjusts. At least at that point, equillibrium can and shall be found. Only then will we cease the seemingly inexorable trek to slavery.
You are mixing up terms a bit. Money represents many things. Money tied to tangible things is only a part of total money supply. Lets say that there is a amount of money that allows one to buy everything in technosphere that has value. This is just a base supply or what I call past money, the accumulated real wealth. But you can buy more actually. You can buy services primarily that do not fit into the same catergory. This would be the present money. And you can buy future, future earnings, future income, by paying a sum now. The future money, the credit money. Now this part of money is the problem because it is actualy betting on the future. That is where risk shows up as an estimate of the future. And whenever future bets don't pay off, a large part of theoretical money (debt/wealth) disappears. FED for example is the one that is mispricing the risk with interest rates adjustments. The effects they are looking for is to stabilize the mathematical constructs of weatlh over longer time periods. The side effect is creating the credit supercycle which when comes due could cause the dark times as it has before.
I would prefer separating these forms of money and having these currencies provided by producers (present money), government (past money) and banks (future money). Then the system should be able to better determine the level of risk desired by accepting or not the bankers money.
I'm not mixing up anything. Credit is the illusion of money. If I loan you $1,000 without $1,000 physically leaving my possession, then you have been given credit. If that $1,000 leaves my possession, then you have been given a loan. Credit creates the illusion of more money than exists because mass/energy is not conserved. This distorts pricing. These distortions in the money supply only compound when the credit has to be repaid.
This is why banks are so powerful. They lend you something which does not technically exist, yet must be repaid in something which does. Over time there are too many bags to be held and it all comes crashing down on the jugglers. This is economics 101 and the basis of the boom/bust cycle.
What you percieve as capitalism is a theoretical Austrian school system that has never materialised. It is a very good system in theory, probably the best.
By Mises' definition, a society this complex could not exist.
You make the common error of conflating the consequences of government intervention with the free market process itself.
What causes friction is inequality.
Wrong again. An economic system where there is equality is a static system. It cannot exist because humans are always trying to better their circumstances. People are not born with equal abilities. Again, you are conflating. What causes friction is an accumulation of calculation errors that squander capital resources.
I always defer to your knowledge base, falak pema, but in this instance I am NOT wanking. I honestly think the Austrian School is as corrupt as the Keynesian School when it comes to illicit drug money laundering.
I wasn't referring to you...
I forgot to line up the comments to comments correctly. Sorry bout that.
:)
You are mental. Most Austrians want free markets in drugs.
This is funny. There has never been a deflationary collapse in history. All governments are still standing. Goldman Sachs still exists. BIS reports derivatives at all time highs. This shit isn't over. It hasn't even started yet.
This is the prelude to the hyperinflationary endgame. THEN it ends.
Yes - you are right. Perhaps Yellen has more metal than I credited her with. If the Fed decides that: 1) the dual-mandate is beyond their capacity, 2) the Fed put is abandoned, and 3) they choose to save the dollar, then governments and banks will fall, but the dollar will remain king for some time. If the Fed folds into permanent QE then the path to the endgame is on. Can the Fed stomach the waves of debt write-offs? History would indicate no. Raising interest rates and letting the Dow fall 300 points a day makes me wonder.
There has never been a deflationary collapse in history. All governments are still standing.
Not true. It's been common practice for governments to run up debts until they default. Hyperinflationary collapses happen to new governments who can't get credit.
Your knowledge of economic history must not exceed fifty years.
The 30`s were very deflationary,, the end game was coming but ww2 saved the day.....if a war can be described that way by any sane non banker
WWII did not save the day. WWII was singularly the greatest destruction of wealth in the entire history of man. Innumberable resources were squandered constructing things which not only did not provide wealth, but were intended to destroy wealth--both human and otherwise.
Relax People..
president obama said Everything is Fine.
Besides Everyone KNOWS they'll just Print More if they NEED to..
It became obvious in 2008 that current economic thinking was fundamentally flawed.
When national economies are more separate, the elites of one nation can be following one set of half-baked ideas and another nation a different set.
When the inevitable crash happens, hopefully you can trade your way out of trouble dealing with another nation that is doing well.
When there is one school of economics that has supplanted all the others due to its consistent and accurate forecasts, which has enabled a national economy to be run smoothly without constant booms and busts for a considerable length of time, we will be ready for a global economy.
Until then, it is better if every nation follows their own set of half-baked economic ideas and when they go wrong, hopefully another nation will be doing well, so that they can trade with them to get out of the current mess.
If/when this unravelling starts, conventional keynesians will never blame the fed or its policies...they will blame capitalism, and the solution will always be more government.
Capitalism, as practised by Great Britain and America is fundamentally predatory, highly prone to cronyism, discriminatory and inflationary. If you think capitlism is so great then please explain to me why we are in this predicament, which has been going on for years now, since before 1971. When banks are allowed to create credit without any real assets backing that credit except a ledger entry of a liability against some other person or entity, it does nothing to increase wealth. It is after all, simply a book keeping entry. It used to create at least a few jobs, but not anymore as all transaction are handle electronically. There is no economic benefit whatsoever in that.
You are correct what the U.S and the U.K. practice is a perversion of true capitalism ,, not a free market
What the US and UK have is not capitalism - it is fascism, a form of socialism. Capitalism means total separation of economy and state. It means property rights are absolute and everyone is free to do whatever he pleases with his own body, labor, and capital. This has never existed in the US, though it was on the way there until the revolution of 1913 and the Progressive Era.
Capitalism died when the Fed was concocted by the bankers to assure that the USG would 'put' their speculations.
I have always believed that the Central banks use austrian economics when they are plotting how to reap from the status quo bots ,, and Keynesian economics to
shroud the actual purpose
If the central banks are secretly subsidizing bad oil loans and proping every other bad loan we are into the end game, still the same question....deflation...inflation
someone enlighten me
The current policy of the Fed to torture those who put off consumption and save has led to a major historical mismatch in the ratio of savings to debt. The current market turmoil, and the waterfall drop in the velocity of money is the result.
The reality is, that by implementing conventional policies on the recommendation of group-thinking macroeconomists, the central banks have dug a hole too deep to escape.
When you have a faulty guidance mechanism (negative feedback control system), greater and greater oscillations will eventually have you leaving the road and crashing. Both Keynsians and Austrians are clueless about negative feedback control systems.
It can all be fixed with a proper responsive negative feedback control system.
Both Keynsians and Austrians are clueless about negative feedback control systems.
Damn! Do you mean that what I know about Austrian Theory on business cycles is wrong?
Now you are forcing me to quote Mises.
True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression. Omnipotent Government, p. 251
SpiritOf42: Yes, you are wrong ... as was Mises and as are the Keynesians.
The "exact" right amount of INTEREST collections is DEFAULTs experienced.
The "exact" right amount of CREDIT is IN-PROCESS-TRADING-PROMISES.
Anything else is just manipulation and counterproductive. If traders are free to make their trading promises based on their ability to deliver on those promises, that's as good as the economy can ever get. People only buy what they believe they can pay for. People on deliver what they believe they "will be" paid for.
The proof of Mises and Keynes ineptitude is the attention they give to prices. Proper management of the Medium of Exchange process cares nothing about prices. It guarantees zero inflation of the exchange media itself.
Don't listen to this idiot.
He believes:
1. That money needs to be managed.
2. That misallocation of debt (as he refuses to believe capital can be accumulated) can be fixed long after the fact, by charging future borrowers higher interest payments to cover for past defaults.
With every market pullback as of late we are forced to wonder if this is the beginning of the end. Have we entered the period that may someday be referred to as "The Great Reset"? This is the period where after decades of modern monetary theory the world reverts back to the tried and true.
When it comes to a falling market however, the market can fall like a stone or in the case of a "realizing market" slowly grind its way downward. The slowly downward and bone grinding action of a realizing market tends to go on forever and a day with no respite. The article below titled, "The Great Reset! Has it begun?" explores this subject.
http://brucewilds.blogspot.com/2016/01/the-great-reset-has-it-begun.html
that was a good article
Quoting a previous STANDOUT post -
"Not being a conspiracy theorist, I suspect ignorance.
This is one of those simple minded attempts at a statement against interest that needs to be chucked overboard. People need to stop apologizing for using their minds to examine facts and come to conclusions. Stop being a shithead who is worried that some idiot might try to label you with a slur from a past era."
Well said sir.
Quite right.
Any consideration of central bank and government policy tells you that such agents have acted consciously and deliberately. ZIRP, QE, and austerity were engineered to transfer wealth to financial elites. Tepid GDP growth was intentional: high growth could have created cost-price inflation which would have endangered the monetary spigot to the FIRE sector.
The truth is, agencies such as the FED have enjoyed great success since 2008. So, they have engineered the basis of a worse
downturn ? Never mind...our elites can take their money and assets and run....
The global fiat currency regime is exactly like an alcoholic in the advanced, terminal stage of alcoholism. The witch doctors' prescribe more and yet more alcohol to cure this alcoholic of his or her alcoholism. I believe everyone understands that will inevitably quicken the alcoholic's death. The Keynesian witch doctors are no different and will be no more successful than the witch doctors treating the alcoholic with more alcohol. The Keynesian witch doctors must be held completely responsible for the terminally ill global fiat currency regime and must be relegated to the ash heap of failed ideas as well as to the unemployment lines.
Ha! Yes. It's "not helpful" to discuss an economics that respects all individual right to life and defense of property.....not helpful if you are a thieving flipping criminal.
Capital accumulation conversion by thought and organized effort into improved production and concomitant increase in the marginal utility of labor is the means to increased growth of jobs and wages and standard of living.
If the investment / savings wealth of the people is stolen or diverted away from this self interest driven process, the death of the nation is only a matter of time.
Since 1940, expressed in 2009 dollars:
Just the federal government has taxed away nearly 100 trillion dollars from individuals.
Social security has removed over 18 trillion dollars, and total social services extraction is over 31 trillion.
Fractional reserve based theft of real goods/services in exchange for counterfeit money is incalculable.
Federal debt representing money spent beyond the above stolen money is over 18 trillion, which does not include the 3 trillion debt from fanny / freddy, nor the trillion in state debt of spending beyond state tax extraction.
The Fed has "purchased" about 4.5 trillion.
A tool of indirect exchange. When created by fiat -- a tool of indirect theft. A tool of indirect murder of a nation.