Archive for September 2012 – Page 2

Economic Blinders

Paul Krugman isn’t the only Princeton economist producing sloppy and ill-informed newspaper columns. Alan Blinder weighs in with a September 6 Wall Street Journal column on the “stark” [sic] differences between the economic programs of Obama and Romney-Ryan. Blinder starts out well enough:

The Rooseveltian consensus embodied three main elements: a modest social safety net to protect vulnerable Americans from some of the downsides of unfettered markets, Keynesian-style policies to shorten recessions, and a progressive tax-transfer system to mitigate income inequality (albeit only slightly).

The two political parties certainly had their differences between the 1930s and the 2000s, but the broad consensus often had bipartisan support. Thus Eisenhower built public infrastructure; Nixon declared himself a Keynesian and established the Environmental Protection Agency; both Reagan and Bush II acted like Keynesians; Bush I promised a “kinder, gentler nation” and Bush II expanded Medicare—unfortunately, without a way to pay for it.

One can quibble with his characterization of the modern welfare state as a “modest social safety net,” and sensible people understand that Keynesian-style policies create and prolong, not shorten, recessions. But it’s true that all establishment political figures since the 1930s, Democrat or Republican, embrace FDR and Keynes. Unfortunately, Blinder then goes off the rails: “But with Messrs. Romney and Ryan, it’s out with Franklin Roosevelt and in with Ayn Rand.”

This attempted bon mot illustrates the vapidity of American political and economic discourse. Paul Ryan says a few nice things about Ayn Rand, F. A. Hayek, and even Mises, and this makes him a devotee of “unfettered markets”! Blinder offers few specifics to illustrate Romney and Ryan’s deviations from the Rooseveltian consensus. He mentions the Ryan budget — that radical document proposing to slash federal spending from 22% of GDP to 20% of GDP, some $5 trillion of annual largesse, by 2040, which is practically tomorrow! A veritable John Galt, that Paul Ryan. And Blinder reminds us that Romney and Ryan have pledged to repeal Dodd-Frank, without which we would have a completely unfettered, unregulated, free-market banking sector. Get ready for dog-eat-dog! The list goes on — Romney and Ryan want the government to provide medicare vouchers, rather than pay medicare bills directly, which certainly sounds like a total free market in medicine to me.

Blinder ends on this unfortunate note: “President Obama stands with President Eisenhower’s emphasis on building infrastructure, with President Reagan’s willingness to raise taxes to reduce the deficit, and with President George H.W. Bush’s call for a kinder, gentler economic policy. Mitt Romney stands with Barry Goldwater and Herbert Hoover.” As Murray Rothbard famously pointed out (1, 2), and most serious historians now acknowledge, Hoover was Roosevelt before Roosevelt was cool. So indeed, Romney stands with Hoover — as does Obama — but not in the sense that Blinder means it.



JoAnn Rothbard

Today would have been the 84th birthday of JoAnn Rothbard.

Read about Joey and listen to her speak about her husband, Murray, who called her his “indispensable framework”.  (Thanks to Pat Barnett)

Video: Herbener on QE3 and Housing Market Stimulus

Watch here. (Thanks to Tom Woods.)

Krugman’s MMMF Question

Paul Krugman attacked Ron Paul, Paul Ryan, and “Honest Money” and also took a shot at Austrian economists on his blog today.  He called honest money a “Ron Paul dog whistle” and then went on to query Austrian economists on their position on Money Market Mutual Funds (MMMF). He doesn’t expect a serious answer.

How do the Austrians propose dealing with money market funds? I mean, it has always been a peculiarity of that school of thought that it praises markets and opposes government intervention — but that at the same time it demands that the government step in to prevent the free market from providing a certain kind of financial service. As I understand it, the intellectual trick here is to convince oneself that fractional reserve banking, in which banks don’t keep 100 percent of deposits in a vault, is somehow an artificial creation of the government. This is historically wrong, but maybe the actual history of banking is deep enough in the past for that wrongness to get missed.

But consider a more recent innovation: money market funds. Such funds are just a particular type of mutual fund — and surely the Austrians don’t want to ban financial intermediation (or do they?). Yet shares in a MMF are very clearly a form of money — you can even write checks on them — created out of thin air by financial institutions, with very few pieces of green paper behind them.

So are such funds illegitimate?

In the Austrian view MMMF are not technically money and so deposit holders do not hold full reserves, but rather invest those deposits in short term commercial paper. MMMF can lose value and owners may get back less than they deposited without the deposit holder going bankrupt. Technically they are not instantly redeemable and are not a final means of payment.

According to Joseph Salerno:

Although MMMF share accounts at first glance look like MMDAs, they are clearly excludable from the TMS, because they are neither instantly redeemable, par value claims to cash, nor final means of payment in exchange. This requires a brief explanation of the nature of MMMFs.

Each MMMF share represents a claim to a pro rata share of a managed investment portfolio containing short-term financial assets, such as high-grade commercial paper, certificates of deposit, and U.S. Treasury notes. Although the value of a share is nominally fixed, usually, at one dollar, the total number of shares owned by an investor (abstracting from reinvested dividends) fluctuates according to market conditions affecting the overall value of the fund’s portfolio. Under extreme circumstances, such as a stratospheric rise in short-term interest rates or the bankruptcy of a corporation whose paper the fund has heavily invested in, the fund’s investors may well suffer a capital loss in the form of an actual reduction of the number of fixed-value shares they own. Unlike a check drawn on a demand deposit or MMDA, therefore, an MMMF draft does not simply represent a direct transfer of current claims to currency, but a dual order to the fund’s manager to sell a specified portion of the shareowner’s asset holdings and then to transfer the monetary proceeds to a third party named on the check. Note that the payment process is not finally completed until the payee receives money, typically in the form of a credit to his demand deposit.

No Paul, we do not want to ban MMMF.

This quote from Joseph Salerno is from the first item to appear on a Google search for “Austrian economics money market mutual fund”.

Overpopulation and Built-in Obsolescence

“The theory of ‘built-in’ obsolescence is fallacious. And, with the advent of the ecology movement and the neo-Malthusian Zero Population Growth adherents, it is more important than ever to lay the fallacy to rest. According to the overpopulationists, we have or are soon going to have too many people in relation to the earth’s resources. In the view of the environmentalists, we are presently wasting the resources we have. Built-in obsolescence is a tragic, totally unnecessary component of this waste.”

–Walter Block, Defending the Undefendable

What Is Bernanke Really Up To?

Bernanke says that the new announced round of money printing ( QE3 plus more Twist)) is intended to reduce unemployment. Does he believe that? It is possible that Bernanke really drinks his own Cool Aid, but I doubt it. Does  he think that stock market gains will boost confidence and somehow help employment indirectly? Perhaps. He has in the past  claimed credit for spiking the stock market, although he must know that the empirical evidence does not show a link to employment gains.

Why then this dramatic move only two months before a presidential election? Is it intended to spite Romney who said he would not reappoint Bernanke? I doubt that too.

The most likely explanation is that Bernanke is worried about the treasury auction market. He wants to be able to use his printed money at will to support it. The new printing and bond buying  program is open ended by date. It can continue indefinitely. Ostensibly the QE3 purchases will be mortgages. That will help the banks, will help treasuries indirectly, and the program can always shift into treasuries at any time. The next step will be to remove the monthly limit and then, presto, the Fed will be able to print and monetize debt at will.

This is also a good time to start the process because other major currencies are committing their own forms of hari-kari. At least for the moment global bond buyers won’t be exiting the dollar in favor of the Euro or Yen– or even the Swiss franc, since the Swiss authorities are madly printing money too.

At some point, however, Bernanke will go too far and spook the foreign buyers. Then his game will be up.


The Arab Recoil and the Cause of Foreign Non-Intervention

In a conversations in the comments of another post on September 7, I said:

“Obama too is guilty of warmongering, nationalism, and corporatism, just as the bailouts and other interventions that Romney and Ryan supported also contributed to regime uncertainty.

Obama is just slightly less disastrous on foreign policy grounds, and Romney is slightly less disastrous on economic grounds.

That being said, in the long run, the above impacts would likely be reversed.

Obama’s foreign meddling will sow the seeds of further conflict and global instability, and yet this failure will be blamed on his allegedly “soft” foreign policy, and thereby give peace a bad name.

Romney’s corporatist economic policies will sow the seeds of further crises and depression, and yet this failure will be blamed on his allegedly “free market” policy, and thereby give capitalism a bad name.”

The series of events that began just 4 day later showed how such “long-term” effects can occur even in the short term.  The current unrest in the Arab world is due largely to Obama’s recent meddling in Libya, Egypt, and elsewhere.  It is a violent recoiling of the U.S.-sponsored “Arab Spring”.  Yet it is being blamed by many (not just in the leadership of the Neocon right, but also for many swing voters, as evidenced by the fact that Obama’s lead over Romney has subsequently evaporated) as a result of a America’s recent failure to “lead”: in other words, not meddling enough.

Mises Takes Manhattan

UPDATE 2: Doug French speaking now. Tune in!

UPDATE: Walter Block speaking now. Tune in! will be live-streaming The Mises Circle in Manhattan tomorrow for free at our Ustream channel.

Here are the scheduled speakers (what a line-up!).  All times are Eastern time:

 Topic: Central Banking, Deposit Insurance, and Economic Decline

9:30 a.m.   David Stockman ”How Crony Capitalism Corrupts the Free Market”
10:00 a.m.  Walter Block “Fractional Reserve Banking”
10:45 a.m.  Douglas French “TAG: Unlimited Insurance,
Unlimited Risk”
11:15 a.m.   Peter Klein “Inner Workings of the Fed”
1:15 p.m.    Joseph Salerno “The Fed, the FDIC, and Other
Problems”   West Lounge, First Floor
1:45 p.m.    Tom Woods ”The State and Its Competitors”
2:30 p.m.    Peter Schiff ”The Real Fiscal Cliff: How to Spot
the Ledge”
3:00 p.m.    Lew Rockwell “War and the Fed”

New Evidence Supporting an Austrian Business Cycle Interpretation of 1995-2012

The Wall Street Journal, in a front page article, Household Income Sinks to ’95 Level ,   summarizing a Census Bureau report released Wednesday, reports, “The income of the typical U.S. family has fallen to levels last seen in 1995, a long and pernicious slide that likely means it will be a generation before Americans regain the peak income levels reached at the close of the ’90s”.  While one should always be careful using median income figures, the data is consistent with and can be best understood when combined with a capital-structure macro model of the economy. A caveat, given that the  peak of the 90s was at the close of the first artificial boom, it most likely overstates sustainable income based on ‘real’ capital available.

A first thing to notice is the timing of the apparent rise and decline in median household income  beginning in the mid 1990s.

Recent analysis (Garrison, Interest-Rate Targeting During the Great Moderation, and

Natural Rates of Interest and Sustainable Growth; and Cochran,  Hayek and the 21st Century Boom-Bust and Recession-Recovery) using an Austrian, capital-structure based macro-economic model argues the U. S. suffered back to back boom bust cycles, the bust and the more recent and more devastating boom-bust accompanied by the housing bubble. These economy-wide boom-busts coincide with the two booms and busts in household income during the same period.

Frank Shostak, author of today’s excellent analysis of the Fiscal Clift (, has long argued that a key, but often overlooked feature of a policy driven boom-bust is capital consumption and hence wealth destruction. Two recent articles in the QJAE strongly reinforce this point; Ravier’s  Rethinking Capital-Based Macroeconomics and Salerno’s A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis.

Ravier (369) argues:

On the other hand, and this is the most relevant aspect, due to the mal-investment process during the stimulus phase we also face a situation in which the potential productive capacity of the economy and thus the real wages potentially earned once the economy returns to normal levels of employment is reduced as a consequence of the partial destruction of capital [Bold emphasis mine]. Many authors, including for example Huerta de Soto (1998, pp. 413-415), focus attention on the “partial destruction of capital” that inevitably occurs because there is a category of resources which are lost when investment projects are abandoned. Stimulus significantly increases the volume of resources that ultimately fall in the “sunk cost” category: at the end of the stimulus phase, some resources have already been committed to investment projects but are not yet productive; when the stimulus phase ends and it turns out that these projects are not going to be completed, these resources are “sunk” costs and not re-assignable to new projects.

Salerno (29-36) provides several pages of discussion relative to the wealth destruction which followed the most recent bust and non-recovery. Figures 9-11 and 14 are most relevant. A summary (36):

After reaching a high of $15.5 trillion in 2007, the index collapsed and fell to a low of $8 trillion in early 2009. As I write this, the Wilshire 5000 has been fluctuating around $12 trillion, a level it first reached in 1999. This implies that there has been no net capital accumulation in the U.S. economy since 1999. The capital that has been accumulated since then has either been consumed or wasted in misdirected investments. But it may happen that even the current level of wealth and income is based on false calculations, because the Fed has used every tool at its disposal and has even forged new ones in order to prop up housing and financial asset prices. The weak and tenuous recovery that the U.S. is now experiencing may well be a reflection of the depth of capital consumption and impoverishment that the U.S. economy has suffered as a result of the inflation-targeting policy of the past two decades [emphasis mine].

This new data just reinforces Salerno’s argument

Monetary policy and government is, not only per Hayek ( 1979, Unemployment and Monetary Policy: Government as Generator of    the “Business Cycle”. San Francisco, CA: Cato Institute.), the “generator of the “Business Cycle, but boom-bust cycles have lasting impacts on households well beyond the recession itself. Another strong piece of evidence that monetary reform – denationalization of money is imperative for a vibrant economy based on sustainable growth.


Production Theory and Man, Economy, and State

“One of Rothbard’s greatest accomplishments in production theory was the development of a capital and interest theory that integrated the temporal production-structure analysis of Knut Wicksell and Hayek with the pure-time-preference theory expounded by Frank A. Fetter and Ludwig von Mises. Although the roots of both of these strands of thought can be traced back to Böhm-Bawerk’s work, his exposition was confused and raised seemingly insoluble contradictions between the two. They were subsequently developed separately until Rothbard revealed their inherent logical connection.”

–Joseph T. Salerno, Introduction to Man, Economy, and State with Power and Market