Wednesday, March 25, 2009
The Threat of Hyper-Depression
I have another cute and cuddly piece at the Daily Reckoning today. Some excerpts:
[T]he country is currently headed straight into a period of very rapid price hikes and a very bad recession. It would not surprise me at all if the national unemployment rate and the annualized rate of consumer price inflation both broke through into double digits by the end of 2009. Moreover, regardless of when it actually starts, I predict that things will get much worse before they get better, and that the United States will be mired in a malfunctioning economy for at least a decade, with price inflation in the double-digits (possibly higher) the entire time. We can call this condition “hyper-depression.”
All of the financial analysts are aware of this threat, but they foolishly reassure us, “Bernanke will unwind the Fed’s holdings once the economy improves.” But this commits the same mistake as the Keynesians during the 1970s: What happens when the CPI begins rising several percentage points per month, and unemployment is still in the double digits? What would Bernanke do at that point? Expecting the Fed chief to relinquish his new role of buying hundreds of billions in assets at whim, in the midst of a severe recession, would be akin to hoping that a dictator would end his declaration of “emergency” martial law in the middle of a civil war.
Comments:
I'm posting this intellectual fodder here in case anyone feels like rebutting this critique of Austrian economics (or pointing readers to links that do the same).
"[T]he ABCT is inconsistent with current institutional realities and modern macroeconomic theory and evidence. There is only a very loose relationship between official interest rates and growth in broad money and credit aggregates under current central bank operating procedures. The ABCT is a fundamental explanation for 'bubbles' because Austrians have an axiomatic theory of the relationship between monetary policy and asset prices. However, the ABCT implicitly assumes some investor irrationality, namely, that investors fail to learn from previous cycles. Proponents of the ABCT argue that this is due to the failure of economic agents to understand or accept their theory — in other words, the theory holds only because most people reject it."
By the way, this is from a "free-market" think-tank!
"[T]he ABCT is inconsistent with current institutional realities and modern macroeconomic theory and evidence. There is only a very loose relationship between official interest rates and growth in broad money and credit aggregates under current central bank operating procedures. The ABCT is a fundamental explanation for 'bubbles' because Austrians have an axiomatic theory of the relationship between monetary policy and asset prices. However, the ABCT implicitly assumes some investor irrationality, namely, that investors fail to learn from previous cycles. Proponents of the ABCT argue that this is due to the failure of economic agents to understand or accept their theory — in other words, the theory holds only because most people reject it."
By the way, this is from a "free-market" think-tank!
# posted by 
: March 25, 2009 at 6:02 PM
: March 25, 2009 at 6:02 PM
Maybe I don't completely ABCT, but I don't think that ABCT necisarrily implies that the investors are acting irrationally.
Think of the housing bubble: Suppose that in the midst of the bubble, I understand that Greenspan lowering the interest rate is causing an expansion of the money supply, which is causing too much money to flow into housing, which, in the long term, is not sustainable. Even if I understand this, if I am a contractor, or a house flipper, there is still a lot of money to be made and it would be imprudent of me to not take advantage of the excess money while I can.
Even if I can predict that the boom is unsustainable I can't necisarrily predict when the bust will occur with the ABCT, and there is a lot of money to be made along the way.
Think of the housing bubble: Suppose that in the midst of the bubble, I understand that Greenspan lowering the interest rate is causing an expansion of the money supply, which is causing too much money to flow into housing, which, in the long term, is not sustainable. Even if I understand this, if I am a contractor, or a house flipper, there is still a lot of money to be made and it would be imprudent of me to not take advantage of the excess money while I can.
Even if I can predict that the boom is unsustainable I can't necisarrily predict when the bust will occur with the ABCT, and there is a lot of money to be made along the way.
Sukrit,
I'm sure that that article successfully refutes some theory, but it would be a mistake to call that theory ABCT.
The article states "There is only a loose relationship between official interest rates and..." No Austrian has ever claimed that the relationship could be described by a stable function with a small residual.
The ABCT doesn't assume irrationality. It assumes that when a signal (market clearing interest rates) is polluted with noise (the effects of monetary policy), investors cannot disentangle noise from signal to make investment decisions consistent with consumer demand.
The ABCT doesn't assume that investors fail to learn from past cycles. Rather, it assumes that past cycles do not contain the information needed to disentangle future price signals from future monetary noise.
I'm sure that that article successfully refutes some theory, but it would be a mistake to call that theory ABCT.
The article states "There is only a loose relationship between official interest rates and..." No Austrian has ever claimed that the relationship could be described by a stable function with a small residual.
The ABCT doesn't assume irrationality. It assumes that when a signal (market clearing interest rates) is polluted with noise (the effects of monetary policy), investors cannot disentangle noise from signal to make investment decisions consistent with consumer demand.
The ABCT doesn't assume that investors fail to learn from past cycles. Rather, it assumes that past cycles do not contain the information needed to disentangle future price signals from future monetary noise.
# posted by : March 25, 2009 at 9:23 PM
: March 25, 2009 at 9:23 PM
The lower classes have known for a long time that we do not have property rights (perhaps that is why many rushed into no doc neg am home loans?) yet it took the AIG bonuses before the upper classes began to realize this. At least they finally are.
"...They are establishing the precedent that if a particular group of rich people does something that angers the government, and if this group happens to be wildly unpopular with the general public, then it is noble for the government to implement ex post facto changes to the tax code, singling this people out and basically robbing them...."
It is really easy to substitute, "working class & lower class" with the word, "rich" and replace the word, "tax" with almost anything as long as, like you write, the public is led to fear it enough. Is that the famous class warfare of socialist & such?
Like bullies who, once they get their way the first time, almost always come back for more & in increase. Case in point, my state govenor ran on a platform of doing something to eliminate bullying in the school system. Afterwards the govenor bullied small unpopular adult groups with increased taxes, then additional regulation twice & submission. Now he is going on how spending his share of the stimulus money is akin to signing a mortgage. And he does seem to act like it is His money and He gets to decide how to spend it and everyone better just like it. ~Whatever.
I am amazed the chart in your article was ever allowed to be released, is it contraband yet?
In case anyone missed it, here is the video for that chart:
http://www.youtube.com/watch?v=pZsY1rFr_yw&eurl=http%3A%2F%2Fwww%2Egarynorth%2Ecom%2Fpublic%2F4527%2Ecfm&feature=player_embedded
What are people rejecting when they reject ABCT? They are rejecting the idea of spending within your means, et al. They may simply not care a wit how they spend their money. Like a drunk throwing $100 bills at a waitress as tips, then complaining they have no money on Monday.
:)
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"...They are establishing the precedent that if a particular group of rich people does something that angers the government, and if this group happens to be wildly unpopular with the general public, then it is noble for the government to implement ex post facto changes to the tax code, singling this people out and basically robbing them...."
It is really easy to substitute, "working class & lower class" with the word, "rich" and replace the word, "tax" with almost anything as long as, like you write, the public is led to fear it enough. Is that the famous class warfare of socialist & such?
Like bullies who, once they get their way the first time, almost always come back for more & in increase. Case in point, my state govenor ran on a platform of doing something to eliminate bullying in the school system. Afterwards the govenor bullied small unpopular adult groups with increased taxes, then additional regulation twice & submission. Now he is going on how spending his share of the stimulus money is akin to signing a mortgage. And he does seem to act like it is His money and He gets to decide how to spend it and everyone better just like it. ~Whatever.
I am amazed the chart in your article was ever allowed to be released, is it contraband yet?
In case anyone missed it, here is the video for that chart:
http://www.youtube.com/watch?v=pZsY1rFr_yw&eurl=http%3A%2F%2Fwww%2Egarynorth%2Ecom%2Fpublic%2F4527%2Ecfm&feature=player_embedded
What are people rejecting when they reject ABCT? They are rejecting the idea of spending within your means, et al. They may simply not care a wit how they spend their money. Like a drunk throwing $100 bills at a waitress as tips, then complaining they have no money on Monday.
:)
# posted by : March 26, 2009 at 2:55 AM
: March 26, 2009 at 2:55 AM Subscribe to Post Comments [Atom]
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