Looking for Introductory Materials on Austrian Business Cycle Theory?

SS466Michael Pollaro, Mark Thornton, and I went looking for some good introductory materials to help newcomers understand Austrian Business Cycle Theory.

Pollaro posted this helpful article over at Forbes, noting:

Indeed, we would say that without ABCT investors are at a competitive disadvantage, for it is only through ABCT that one can truly understand what is underpinning the economies and financial markets of today.

And he links to several resources including this journal article by Joseph Salerno, and this very easy breakdown by John Cochran.

There are many other resources, Mark and I might point you to as well.

For starters, there is Rothbard’s Economic Depressions: Their Cause and Cure, and Richard Ebeling’s collection of essays, including works by Hayek, Mises and Garrison.

Other resources include:

This survey of ABCT on the Mises Wiki.

Manipulating the Interest Rate: a Recipe for Disaster by Thorsten Polleit

Austrian Business Cycle Theory: A Brief Explanation by Dan Mahoney.

And several videos including:

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Why Money Doesn’t Measure Value

gold2Mises Daily Friday by Robert Murphy:

Robert Murphy, contra Real Clear Markets and Forbes, explains why money is not like a ruler and doesn’t measure value.


Patrick Barron: The End of the US Dollar Imperium

Jeff Deist and Patrick Barron address the issue of monetary imperialism. How does the US use the dollar as a weapon of economic and cultural power? How long can it last? What might the unprecedented collapse of a worldwide reserve currency look like? And how do the BRIC nations and Asian central banks fight back?

Patrick Barron is a private consultant in the banking industry. He teaches in the Graduate School of Banking at the University of Wisconsin, Madison, and teaches Austrian economics at the University of Iowa, in Iowa City, where he lives with his wife of 40 years.

Also available at Stitcher and Mises.org.

Public Accommodation and Social Engineering

6936Mises Daily Friday by Nicholas Freiling:

Public accommodation laws that prohibit discrimination render property rights moot and create a legal system designed to force agreement with the state’s official moral code.

Legal Victory for the IRS

160px-IRS.svgWith the IRS scandals of early 2014 all but a distant memory, some closure is coming to the groups that the long arm of the tax law harassed. Unfortunately the verdicts aren´t going the way the affected would like.

The IRS may have inadvertently figured out how to win its legal battles against aggrieved tea party groups: Give them what they wanted in the first place — tax-exempt status.

That was a major reason a Republican-appointed federal judge on Thursday threw out two lawsuits brought by more than 40 conservative groups seeking remedies for being singled out in the tea party targeting scandal, a victory for the IRS.

More troubling than the apparent lack of justice (we wronged you, but then later made it up to you so we don´t need to be punished?!) is the reasoning behind the Federal Judge´s decision.
Judge Reggie Walton of the U.S. District Court of the District of Columbia dismissed almost all counts brought against the tax-collecting agency in two cases, ruling that both were essentially moot now that the IRS granted the groups their tax-exempt status that had been held up for years.Walton, a President George W. Bush-appointee, also said individual IRS officials could not be fined in their individual capacity for allowing such treatment because it could hurt future tax enforcement.
I guess I missed the memo where enforcement of the law included provisos to protect the ability of the law-breaker to further break the law in the future. I mean, wasn´t the original problem that the IRS was unduly harassing certain groups? If that´s the case, and the IRS is found guilty (which it was, just not punished), shouldn´t the law try to stop such harassment from happening again.
To use an analogy, let´s say I park in of my neighbour´s lane so he can´t leave to get to work in the morning. A couple days later I move my car, and the obstruction is gone. My neighbour takes me to court, and the court agrees that I unduly blocked him, but I´ve since moved my car so it´s a moot point. My neighbour says that´s ridiculous, and wants charges against me for trespassing on his property and stopping him from leaving. The court finishes by telling my neighbour that nothing can happen to me personally because that would dissuade me from parking in his lane in the future and blocking him in.

If you think that I´m getting off scot-free in the example above, I can only think of what you think of the IRS right now.

There Was No Contagion

Eurozone_2009.svgIf you use the word “contagion” these days, people are likely to think you’re talking about ebola. Backup five years ago, and contagion was the buzzword to describe the financial crisis.

The European government bond market was falling apart, and allegedly it had nothing to do with the precarious public finances they were built on. Instead the excuse was that  there were a couple bad apples (Greece, Ireland, and than Portugal), and these isolated cases were shaking investors’ nerves and causing them to be irrationally weary about supposedly “safe” countries, like France or Germany.

At the time I said it was a completely ridiculous use of the word contagion, as normally one would only use that if the person infected was not culpable in transmitting the disease.

The one common theme amongst European public finances was that they had high tax rates and even higher levels of expenditure. Deficits, extremely large in some cases (Ireland), were practically the norm. If countries were having a tough go issuing more debt, it wasn’t because of some vague cause like contagion, but because of years of bad political choices left them in terrible financial shape.

As it turns out, two NBER economists have drawn the same conclusion with a retrospective look at the Eurocrisis. Not only could they find only very small “spillover effects” (contagion) during the crisis, but investors didn’t seem that worried either.

Of course, if there was no contagion, and investors weren’t even erroneously acting like there was one, who was behind all the talk? As always, politicians searching for an excuse for their shoddy finances latched on to a notion and got the world worked up in a frenzy, giving them free reign to pass whatever policies they liked to keep their financial endgame going a little while longer.

(Cross posted at Mises Canada.)

Larry White’s Baffling Interview on the Gold Standard

Lawrence H. White speaking at the Mises Institute's Capitol hill Gold Standard Conference, November 1983

Lawrence H. White speaking at the Mises Institute’s Capitol Hill Gold Standard Conference, November 1983

In his recent three-part interview (here, here and here) on the gold standard, Larry White perplexes almost as much as he enlightens.  Let’s critically review  his responses to a few of the interviewer’s questions.

First, when queried about the evolution of the discussion of the gold standard among classical liberals including Austrian economists as well as in academia more broadly, the general literature, and policy institutes, White expresses general optimism.  He concludes his answer with some observations about policy institutes:

Among the policy think tanks, the Cato Institute’s annual monetary conference has kept the fundamental issues alive for more than thirty years. I see their efforts expanding and reaching a wider audience.  The Heritage Foundation is now showing some interest.  The Atlas Network is now championing sound money. The Gold Standard Institute is growing in visibility.

A glaring omission in White’s answer is, of course, the Mises Institute, which held its first conference on the gold standard over 30 years ago.  Since that time it has campaigned tirelessly for the gold standard, devoting many of its conferences and publications to sound money.  Its associated academic economists and other scholars have published thousands of pages on the subject.  The Mises Institute has also served as the main intellectual support for Ron Paul, surely one of the most popular and influential  defenders of sound money as a U.S. Congressman and now as a public intellectual.  The Mises Institute continues to shape the debate on the gold standard.  In fact just today. RealClearMarkets, a website owned by Steve Forbes, published a response by economist and Arthur Laffer disciple Marc Miles to a critical review of Steve Forbes and Elizabeth Ames’ book Money: How the Destruction of the Dollar Threatens the Global Economy - and What We Can Do About It  written by Mises Institute scholar David Gordon.

Remarkably, while ignoring the Mises institute, White finds it fitting to recognize the obscure Gold Standard Institute.

The Gold Standard Institute was founded and is presided over by Keith Weiner, a principal in a for-profit gold fund business.  Weiner received a PhD from the New Austrian School of Economics (NASE), a non-accredited institution founded by Dr. Antal Fekete, a mathematician and a proponent of the gold standard based on the  long discredited real-bills doctrine.

Moving on, when asked if he was familiar with Nathan Lewis’s Gold, The Monetary Polaris, a book he commented on at a Cato monetary conference, White answers:

I offered a few academic quibbles, but the book does a good job marshalling historical evidence to demonstrate the chief merits of a gold standard.

White’s response here is another head scratcher.  It is true that Lewis’s book does provide a valuable historical discussion of different monetary regimes involving gold.  However the analytical part of the book is a mess.  Lewis is not in favor of a gold standard in any meaningful sense of the term and does not even have a clear idea of what the gold standard actually is.  He  treats the “gold standard” as a deliberate invention of government policy, what he calls a “a fixed-value system with gold as the policy target.” For Lewis,  all historical varieties of the gold standard are simply price-fixing schemes in which the monetary authority targets the currency price of gold that it has chosen as the parity .  Indeed under Lewis’s so-called  ”no gold” gold standard, the money manager neither buys or sells gold at the parity price nor  holds any gold reserves.  Rather it “targets” the price of gold by buying and selling bonds.  It may even buy or sell “fine art” to target the gold price.  Furthermore,  Lewis does not view the gold standard as supplying an inherently scarce commodity money.  Rather he sees the gold standard as a clever device for constraining the  ”currency manager” to ensure that the supply of currency, i.e., “banknotes with no intrinsic value,” remains artificially scarce and therefore valuable.  Of course, Lewis’s view is preposterous because it puts the cart before the horse.   A thing could never become money in the first place unless it was an item that was already scarce, valuable, and had a price in terms of other goods and services against which it was actively traded.  Thus bank notes could never come into existence except as claims to an existing , scarce commodity like gold.  No governmental bureaucracy is needed to ensure that money remains scarce.

Lewis also maintains that gold possesses an intrinsic, constant value and therefore serves as an absolutely fixed  ”measure” of value for other goods and services.  Lewis pushes this absurd view to its logical conclusion by calculating “the equivalent gold value of labor,” which he believes more accurately reflects the variation of real wages over time than conventional indexes of real wages based on the fiat dollar.  His calculations using gold as an alleged unit of constant value indicate that annual real wages declined by 86% between 1970 and 2010!  Lewis’s views on money and banking are just as bizarre.  Thus he asserts:

U.S. banks today don’t actually ‘create money’ or ‘reduce money’. . . . They create and reduce credit.  ’Credit’ just means a loan of some sort.

I could go on, but given the gross misrepresentation of the nature and function of the gold standard and of money in general that one finds in Lewis’s book , it is hard   to imagine that White could only summon up “academic quibbles” with it.

Finally, when asked about the critics of fractional reserve banking, White responds by falsely implying that all critics of fractional-reserve banking want it outlawed.  By doing so, he deftly side steps the serious criticisms of the economics of fractional-reserve banking by those advocates of free banking, such as Ludwig von Mises, Guido Huelsmann, myself, etc., who are in favor of freeing banks from all political regulations while denying them government bailouts and insurance.  These latter critics believe that a completely free market in banking will lead to the natural suppression of “fiduciary media”, i.e., bank notes and deposits unbacked by the money commodity.  But  White cannot be bothered with addressing such nuanced  arguments when there are  polemical points to be scored with a gratuitously nasty gibe:

 I’ll just say that those who want to outlaw modern intermediation (and by modern I mean post-Dark-Ages), and build our payment system instead on literal gold warehousing . . . It’s a kind of financial Luddism.

I should have thought that such a well versed economic historian like White would be familiar with the Dutch Golden Age, which occurred long after the Dark Ages.  The Dutch had the most prosperous economy and the highest standard of living in Europe from 1600 to 1820.  And they accomplished this feat without “modern intermediation,” by which White means the creation of notes and deposits by commercial banks.  Dutch financial and monetary institutions were strictly separate.  Merchants,and businesses obtained finance via bills of exchange and by selling shares and bonds on the Amsterdam Bourse, the oldest formal securities market in the world.  Deposit keeping, payments, and foreign exchange services were provided by the 100-percent reserve Bank of Amsterdam.  Finance did not create money and money creation did not dissemble as finance

As for financial Luddism, I would think that charge is better leveled at someone who forecasts that a hybrid monetary/financial arrangement which might have thrived in circumstances peculiar to 18-century Scotland would just happen to be the type of arrangement that entrepreneurs in the 21st century would rediscover and implement when modern money and finance is completely separated from government.

No Bubble Here!

Back when I was an economist for a housing agency, I heard about a lot of pricey marketing gimmicks. This is a new one:

Writes Robert Wenzel:

Paging Mark Thornton: The Ultimate Sign of a Chinese Real Estate Bubble?

As part of a marketing campaign by a property developer in Nanjing, China, to entice people to view his apartments, the developer arranged for a group of people to have their lunch inside a glass dining room, suspended by a crane some 66 feet in the air.

Understanding “Quid Pro Quo”

6934Mises Daily Thursday by  Gary Galles:

The term “quid pro quo” has been twisted to now include government handouts and state-mandated exchanges, so long as the value of goods trading hands are deemed to be of “equal value.” True voluntary exchange, on the other hand, is something quite different.

The Index Card of Allowable Opinion

6935Mises Daily Thursday by Tom Woods:

Tom Woods explains the “unacceptable“ opinions behind freedom and free markets.



Check out Tom Woods’s interview about the book on Mises Weekends:

Lessons on Economics and Politics from South Park

South_ParkLearnLiberty.org is offering a new course developed by George Crowley of Troy University titled “Subliminal Lessons from South Park: A Super Primer on Economics and Politics.” The course blurb:

Hooowdy Ho Everbody! We are excited to bring you our newest program on economic lessons from the greatest TV show in the world, South Park. In this program, you’ll learn about cool stuff like voting, business, immigration, and the secret to killing manbearpig. So respect mah authoritah and learn about the intersection of economics and politics from your good friends Kenny, Kyle, Cartman, and Stan. You’ll have the best time you’ve had all year learning about economics through the lens of this hiiiiiiilarious cartoon…mmmkay?

Matt Stone, one of the creators of South Park, was the son of my late colleague, mentor, and dear friend Gerald Stone. Stone was one of my undergrad profs and hired me at Metro State.  Stone, after he retired at Metro in 1996, authored CoreEconomics. Earlier he co-authored with Ralph Byrns a very successful principles book (6 editions). Byrns and Stone highlighted the work of Mises and Hayek (first edition 1981). It was one of the first principles books to effectively deal with NUR and later was one of the few books give supply side economics a fair presentation.

Watching many an episode, I can imagine a young Matt being influenced as Jerry ranted at some economic illiteracy being presented on the news. More on Jerry here: http://www.macmillanhighered.com/Catalog/Author/geraldstone.

HT to Art Carden.

Happy Birthday, Ralph!

Today is the 78th birthday of Ralph Raico, the foremost historian of classical liberalism.  Among many other works, Ralph is the author of two outstanding collections of essays, Classical Liberalism and the Austrian School and Great Wars and Great Leaders.  As the latter title suggests, he is a great exponent of revisionist history. In all of his work, he shows profound learning, keen analytic powers, and an unwavering commitment to liberty.  He was one of Murray Rothbard’s closest friends and a member of the famous Circle Bastiat. He is also one of the funniest people I have ever met.

Editor’s note: See also Raico’s ten-part lecture series.


Global Warming Debate Over: We’re Doomed

Annual_Average_Temperature_MapAccording to Guy McPherson, Professor Emeritus of Natural Resources, Ecology, etc., at the University of Arizona, (presumably man-made) climate change is “irreversible” and, basically, we’re all doomed.

As I’ve noted before, anyone who actually values human liberty and progress should welcome declarations of the “irreversible” nature of global warming. After all, if there’s nothing we can do to stop it, then we can just get on with our lives and leave humanity to dealing with environmental problems as they come, which is what homo sapiens have been doing for millennia.

So, McPherson’s pronouncement that it’s irreversible is a real load off. We can stop having the debate about whether or not to crush human economic progress with global regulatory efforts to massively reduce everyone’s standard of living via carbon emission controls (except for the super-wealthy and politically-well connected, of course).

But not so fast.  McPherson has come up with a novel twist on this one. Even though humanity is totally doomed, that doesn’t mean we can now just drop the issue and get back to increasing our standards of living as fast as possible in our last remaining years. Nope, we apparently have a responsibility to destroy ourselves so that other animals can have the planet instead. The method of suicide? We must “terminate industrial civilization.”

Since McPherson considers himself qualified to speak on these matters, I’m going to assume that he is in fact aware that terminating industrial civilization would result in the near-immediate starvation of a large portion of the human race. This no doubt fits into his plan to destroy humanity for the sake of amoebas and elk, but he then implies that he doesn’t understand what the end of industrial civilization means when he declares that, being doomed, our only choice is is to “enjoy and create moments of joy while we are here.”

So which is it? Should we terminate industrial civilization or “create moments of joy,” because those  two propositions are mutually exclusive for the vast majority of humans.

Perhaps McPherson is one of those people who is under the mistaken impression that prior to industrialization, life on earth was some sort of bucolic joy-filled wonderland. Such risible nostalgia for a past that never existed seems to infect many environmentalists. The reality of the good ol’ days of the pre-industrial world, of course, is one of scratching a subsistence out of the ground from dawn until dusk while hoping one isn’t struck down by some plague.

For most people, joy comes from having some free time in relative comfort, and access to modern medical amenities when one falls ill. Without industrial civilization, there’s no modern medicine, little comfort, and certainly no free time to speak of. Where we’re supposed to attain this “joy” is a mystery in McPherson’s vision.

The End of QE3, Trouble Ahead for the Bulls?

Austrian economist Micheal Pollaro writes that with the end of QE3 coming that stock market bulls need to take a note of caution because the Austrian measure of the money supply is already falling. This is typically a sign of trouble for stock markets.

The Federal Reserve’s latest asset purchase program, QE3, is coming to an end. What was once an $85 billion a month program, one in which at its peak had been goosing the financial markets and economy at an annual rate of $1.0 trillion – and over its 27 month life will have pumped $1.7 trillion of money into the economy – is going to zero. Given the outsized impact QE has had on the growth of U.S. money supply and thus the U.S. economy, we say investors take note, especially those furthest out on the risk curve, because what was once your primary tailwind could soon become your greatest headwind, maybe even a gale force.

Thus, when an economy is subjected to a bout of monetary inflation, investors can enhance their performance by correctly positioning their portfolios on the right side of the boom-bust cycle. Though easier said than done, one should buy claims to the malinvestments of the boom; i.e., when the money supply is surging; then sell those same claims after the growth in the money supply peaks and begins to head down. Importantly, the bigger the bout of monetary inflation, the more important it is to be positioned on the correct side of the boom-bust cycle. The reason is simple – lots of monetary inflation means lots of malinvestments in the economy and financial markets. Indeed, correct positioning is even more important on the downside of the boom-bust cycle. You see, booms tend to develop slowly. Busts, complicated by the distortions created during the boom, more often than not do anything but.

Now you know why we call this current monetary cycle the Bernanke Risk-On Boom – Bust-to-Be! Unlike in past monetary cycles where money was largely injected into the real economy via bank asset purchases and loans, this inflation cycle is all about huge swathes of money being injected directly into the financial markets via Federal Reserve’s QE asset purchase programs. The banking system, at least to this point, has had a minor role.

Unless the Federal Reserve changes its mind, the last installment of QE is ending next month. That means that if the banking system, the other and more traditional source of monetary inflation, does not step up and fill the inflationary void being vacated by the Federal Reserve, the money supply is set to fall, and fall substantially in the coming months.

In other words, bulls take heed – our yellow light could be tuning red.

I Only Read It for the Articles! Rothbard’s Penthouse Interview


G-Rated (Almost) Edit of October 1976 Cover

In the 1970s, Penthouse magazine had a reputation for featuring the ideas of unorthodox political thinkers and movements. That’s why in October 1976 it interviewed Murray Rothbard to ask about the rapidly-growing philosophy of libertarianism. This interview is now difficult to find, but was recently excavated from the archives at the Mises Institute.

The article begins with an introduction that provides a great snapshot of both Rothbard’s work and personality:

The Murray Rothbard wall poster depicts a graying professor pecking at a typewriter. His words rise magically from the machine and blend into a black flag of anarchy rippling above his head. Beneath the drawing is this caption: “Murray N. Rothbard—the greatest living enemy of the state.” The poster, like almost everything else relating to politics, causes Rothbard to laugh… If someone mentions the name of almost any establishment economist or political figure, Rothbard will respond with a nasal guffaw… Jerry Ford, John Kenneth Galbraith, Alan Greenspan, Ronald Reagan—they all receive the same response: a laugh followed by a theoretical disputation in which Rothbard employs buzz-saw logic to rip into these persons he views as enemies of liberty, prosperity, and the common good.

There are some entertaining stories as well. For instance, the interview points out that Rothbard’s criticism of conventional economics made him an unpopular choice for private consulting, which is often a lucrative line of work for economists. In Rothbard’s case though, “Only one firm—a mushroom factory—has called on him for consulting advice in the past twenty years.”

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World War I in Our Minds: A Historical View

6933Mises Daily Wednesday by Hunt Tooley:

With 100 years having passed since the start of the First World War, the view of the war among historians and the public has evolved in many ways. Historian Hunt Tooley examines the turning points in how the world sees the Great War

The Fed as Stock Market Manipulator

The notion that the Federal Reserve has been acting to manipulate stock markets has been active for decades, but rarely has that notion been openly discussed in the mainstream media. In this article by Howard Gold the Fed is praised for its “market timing” as Fed official quickly responded to recent volatility in the stock market with promises of more quantitative easing if necessary.

Investors got the message. The S&P 500 Index advanced for three straight days and the VIX fell under 20 again.

Bullard was only the latest Fed official whose words or actions “just happened” to boost the stock market when it was down.

“They are definitely in the market-manipulation business, and nothing has changed,” said James Bianco, president of Bianco Research LLC in Chicago and a longtime student, and critic, of the Fed.

Called the “Greenspan/Bernanke put,” the Fed’s willingness to jump in when stocks fall dates back a quarter-century.

“The put option is back. If the market sells off enough, they will give us QE4,” Bianco told me.

Conspiracy theorists have pinned it on a government “Plunge Protection Team” that wants to keep stocks from crashing at all costs.

But conspiracy or no, consider these actions:

Aug. 31, 2012: In his annual speech in Jackson Hole, Wyo., Fed Chairman Ben S. Bernanke all but announced the third round of QE, extraordinary bond buying of $85 billion a month. The S&P 500, which had languished after a nearly 10% decline, rallied from 1,399 points and hasn’t corrected substantially until now.

Sept. 22, 2011: Following a 19.4% stock sell-off amid a debt crisis in Europe and the U.S., the Fed launched Operation Twist, in which it sold short-term and bought long-term securities to push down long rates. After first slipping, the S&P 500 resumed a multiyear take-off that, with a little help from the Fed, ultimately drove it 80% higher.

Obama Appointee Supports Individual Rights

vguptaI’ve been critical of the Obama administration in the past, so it’s nice to find something positive to say. This article says that President Obama’s new acting head of the Justice Department’s Civil Rights Division, Vanita Gupta “supports decriminalizing cocaine, heroin, LSD, methamphetamine, ecstasy and all dangerous drugs, including marijuana.” It’s nice to see that someone in government supports individuals’ rights to make their own choices, rather than having the government tell them how they have to live their lives.

My personal view is that it is a bad idea to take any of these drugs, but just because that’s what I think, or that’s what some politicians think, doesn’t mean it should be illegal for you to do things other people think are bad for you. “Freedom” is meaningless if you only have the freedom to make choices that your government thinks are good choices.

The article says Ms. Gupta has argued that the misnamed war on drugs “is an atrocity and that it must be stopped.” The article goes on to say that she objects to what she perceives as draconian mass incarceration, which has resulted in a bloated prison population, and the war on drugs that she perceives as a failure.

I don’t know anything about Ms. Gupta beyond what is in that article, and the article focuses on her supporting freedom for individuals to make their own choices with regard to drug use, rather than have government dictate those choices for them.

Based on that article, everything I know about her is positive, and I’m happy to see the president appointing people who stand up for individual rights.

The article I linked to came from The Daily Signal, an internet publication of The Heritage Foundation. One would expect the conservative Heritage Foundation to be at odds with the Obama administration on most issues, but I admit that I am disappointed in this case that The Heritage Foundation, which claims on its website to support public policies based on limited government and individual freedom, is taking a stand against individual rights, and in favor of more government oversight and interference in our lives.

People are not free if they are prohibited from making what those in government perceive are bad choices. In this case I am happy to see the Obama administration standing up for individual rights, and disappointed that a prominent conservative organization supports the nanny state.

David Gordon: The Life and Times of Murray Rothbard

6932Mises Daily Tuesday with David Gordon:

David Gordon and Jeff Deist discuss Rothbard’s life from an insider’s perspective, his relationship with Mises and the areas where they disagreed, and more.


The Fed’s New Labor-Market Measure

6931Mises Daily Tuesday by Frank Shostak:

The Fed has created a new measure of employment that it says it will use to guide monetary policy. Unfortunately, simply knowing employment trends tells us little about whether or not real wealth is being created in the economy.