Archive for February 2013

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Central Banks Debunked

Gerald P. O’Driscoll’s hard-hitting piece in today’s Wall Street Journal, Debunking the Myths about Central Banks is well worth reading. Among others, O’Driscoll addresses the myth that “central banks are intrinsically necessary for market economies.” As O’Driscoll points out, however,

A gold, or any commodity, standard places a natural limitation on money creation, which is the resource cost of extracting the commodity. It is only with fiat (paper) money that central banks are necessary to control the money supply

One should not conclude from this that O’Driscoll fallls prey to the myth of a central bank that is able to scientifically control the supply of fiat money independently of politics. In fact, he explodes this myth by pointing to the Fed under Chairmans Martin, Burns, Volcker, and Bernanke all of whose polices were powerfully shaped by the interests of the Presidents they served under. O’Drisoll concludes: “A central bank is necessary as long as an economy is wedded to a fiat currency. And it may at times behave independently—but not in the face of large-scale budget deficits, as we have today.”

The Great Sequester Ho-Hum

Economist and former Texas US Senator Phil Gramm recalls the budget sequesters in today’s Wall Street Journal:

The president’s response to the sequester demonstrates how out of touch he is with the real world of working families. Even after the sequester, the federal government will spend $15 billion more than it did last year, and 30% more than it spent in 2007. Government spending on nondefense discretionary programs will be 19.2% higher and spending on defense will be 13.8% higher than it was in 2007.

Bernanke the Comedian

Dr. Brendan Brown is an eminent financial economist in the City of London and the author of The Global Curse of the Federal Reserve, initially published in 2011 and just released in its second revised edition. In his book, Brown is critical of Milton Friedman and the monetarists for ignoring the effects of monetary expansion on interest rates and asset prices and for assuming that a stable price level indicates an absence of inflation. Brown adopts Rothbard’s view that the 1920s were an inflationary decade, because, despite the rough price-level stability that obtained, asset and commodities markets were “overheated.” Brown also rejects the monetarist argument that price-level stabilization is the sine qua non of economic stability. He argues that price stabilization policy is one of the “dangerous features of Friedmanite monetarism” which “Austrian critics have long highlighted” and “which in hindsight may have played a role in the growth in Bernanke-ism.” Finally, and most insightfully, Brown also maintains that deflation is effective–and indeed, necessary–to extricate an economy from the depths of a recession or depression.

Needless to say, Dr Brown is no fan of Chairman Bernanke. In fact, in a memo today, Brown perceptively identifies the comedic aspect of Bernanke’s testimony on the first day of his semiannual monetary policy report to Congress. Writes Brown:

Comedy according to the theorists of drama is based on inflexibility of character. The lead role cannot in any way bend his stereotyped behaviour even when this would avoid an accident or disaster which is looming. And so “Don Juan” of Molière is a comedy. Even when the ghostly statue of his slain victim threatens to take Don Juan on a fiery descent into hell, the lead character cannot show remorse and desist from his life of debauchery. Chekhov listed his “Cherry Orchard” as a comedy because the lead characters could not shake themselves out of their nonchalance and avoid bankruptcy by selling the cherry orchard of their villa to a property developer on which he would build bungalows.

And so we come to the monetary comedy which played out in Washington yesterday. Professor Bernanke, adamant as always that the road to economic prosperity and stability takes the form of a rigorous targeting of inflation and supremely confident in a good outcome to his massive monetary experimentation tells his Congressional questioners that he sees no signs of asset price inflation which would justify changing his present policies. This is the same professor who largely repudiates any concept of asset price inflation and believes totally that any such dangers can be avoided well ahead of time by skilful action on the part of an army of regulators following the recently expanded book of rules. And this is the same professor who denies that monetary disequilibrium played any role in the giant asset and credit market inflations of the last two decades.

There is another element in the monetary comedy under the title of “Fed chair’s semi-annual testimony to Congress”. This is the failure of congressional questioners to hold the professor to account. When he declared that there is no asset price inflation, there was no follow on question such as “but professor you still say there was no asset price inflation in the last great bubble and bust and deny that the Fed of which you were a leading policy maker was in any way responsible: why should we believe you now?” That there should be no such question is part
of the comedy, in its literal sense.

Dr. Brown will deliver the Murray N. Rothbard Memorial lecture at the Austrian Economics Research Conference in March 2013.

America’s Great Depression Quote of the Week: The Nature of the Boom and Bust

Boom and Bust: What must be explained in any theory of the business cycle?

First and foremost is the general cluster of errors. See Hulsmann’s Toward a General Theory of Error Cycles:

 The explanation of depressions, then, will not be found by referring to specific or even general business fluctuations per se. The main problem that a theory of depression must explain is: why is there a sudden general cluster of business errors? This is the first question for any cycle theory. Business activity moves along nicely with most business firms making handsome profits. Suddenly, without warning, conditions change and the bulk of business firms are experiencing losses; they are suddenly revealed to have made grievous errors in forecasting.

Second, what has been recognized in real business cycle theory as a stylized fact of cycles, is the greater fluctuation of time dependent industries (capital goods and consumer durables) relative to industries serving more immediate consumption.

 Another common feature of the business cycle also calls for an explanation. It is the well-known fact that capital-goods industries fluctuate more widely than do the consumer-goods industries. The capital-goods industries—especially the industries supplying raw materials, construction, and equipment to other industries—expand much further in the boom, and are hit far more severely in the depression.

Third is the correlation between money and output over the cycle.

 A third feature of every boom that needs explaining is the increase in the quantity of money in the economy.

This third feature is highlighted by real business cycle models as well but is viewed as harmless reverse causation. But as Rothbard shows, the money and credit creation during the expansion, rather than being a harmless endogenous response of banks to changing market conditions, sets the stage for the boom-bust pattern of the cycle.

All quotes are from pp. 8 and 9.

The $59 Recession Solution

George at “Barbarous Relic”, writes:

Joseph Salerno, professor of economics at Pace University and author of Money, Sound and Unsound, recently taught a course in Austrian Macroeconomics at the Mises Academy.  For a $59 registration fee that included all the reading material, anyone with access to the internet could sign up. As with all Academy courses, the lectures were recorded and are made available to students indefinitely.

In his final lecture Salerno presented the Austrian Business Cycle Theory and showed how, during a recession, the policy prescriptions of the Austrians differs from those of the Keynesians.  The chart below summarizes and contrasts the policies.

What follows is my understanding of the chart, and any errors of interpretation are mine alone.  In English, the chart reads as follows:

Fiscal policy, Austrians
: Lower Taxes (down-arrow T), reduce government spending (down-arrow G), and balance the budget (Taxes minus government spending equals zero).  Note: Paul Krugman would likely condemn this policy as “fiscal austerity,” and it is – for the government.  But obviously not for the taxpayers.

Fiscal policy, Keynesians: Lower taxes, increase government spending, and run deficits (government should spend more than it collects in taxes).  Note: Lowering taxes in a recession is the one area where Austrians and Keynesians agree, though President Obama, who in other ways follows the Keynesian playbook, has raised taxes.

Monetary policy, Austrians: Freeze the money supply M (delta M equals zero), let the interest rate adjust according to the time preference of market participants.

Monetary policy, Keynesians: Goose the money supply (up-arrow M), annihilate the interest rate (down-arrow i).

Microeconomic policy, Austrians: Repeal all laws keeping the market from clearing, including policies that prevent wages W and prices P from adjusting to supply and demand.

Microeconomic policy, Keynesians: Use the power of government to keep wages and prices from adjusting to market conditions.

Regulatory policy, Austrians: Remove government regulations and allow the market to perform its regulatory function instead.

Regulatory policy, Keynesians: More government regulations, especially in the financial sector.

No one in the seats of power saw the financial crisis coming because, we’re told, financial crises are a lot like “earthquakes and flu pandemics,” difficult to predict.  Not coincidentally, none of those in power are Austrians.  After five years of Keynesian and other anti-market “remedies,” Europe overall is in recession, while U.S. growth in the last quarter of 2012 declined by $4.9 billion even with a $165 billion “stimulus” behind it.  Before the Fed and the government decided to “do something” about a floundering economy, crises lasted on average 18 months to two years.  Although this last one was officially over in 2009 – see Robert Murphy’s take on what this means – unemployment is still high, while optimism among consumers and small business owners remains very low.

I don’t recall reading any restrictions that would’ve prevented central bankers and senior government officials from registering for Salerno’s course.  It’s too bad for them but especially for us, because given their track record we can expect even bigger calamities down the road.  If they found the registration fee too pricy but would otherwise be willing to take the course, I would be glad to empty my piggy bank on their behalf the next time it’s offered.

We need to let the market breathe before the Keynesian maestros put us out of business.

Mark Thornton Explains the Real Meaning of Austerity

Ryan McMaken writes:

In the February The Free Market, Mark Thornton notes that in the current media narrative, “austerity” means raising taxes to pay wealthy bankers.

Authentic austerity -the good kind-forces the government to actually get smaller:

Real austerity is not adding more difficulties on the productive sector of the economy in the form of higher taxes. The private sector produces, the public sector consumes. The IMF’s idea of raising taxes on individuals to pay off international banksters is bad economics and is not real austerity.

Read more here (PDF).

Classing Up The General Theory

Here is an image of the back cover of the Romanian edition of Keynes’s General Theory published in 2009. If you look close enough you will see that the blurbs feature quotations from Murray Rothbard, Ludwig von Mises, and Paul Krugman, in that order starting from the top. Rothbard’s and Mises’s statements do not refer directly to Keynes or the General Theory, and it is hard to understand why they would be there except to add cachet to the book. It’s just another example of the ever-expanding and world-embracing influence of the two greatest economists of the twentieth century.

HT to Carmen Dorobat.

Keynes's General Theory

A Satisfied Student

A Mises Academy student emails Joseph Salerno:


I just wanted to tell you how much I enjoyed this course! It was my first offering from the LvMI and I look forward to many more. I also liked the title you chose….very clever….it peaked my curiosity!

I feel much better armed to define/defend Austrian concepts as I deal with the statists around me. You have helped to “deprogram” me from some of the undergraduate econ courses I have taken. Thanks again for such a wonderful learning experience. I look forward to future offerings. Well done.

Ron Paul on the Libertarian Future, at the recent Mises Circle in Houston