Understanding why Austrian Economics is Flawed

Austrian economics has been through quite a rollercoaster ride over the last 10 years as the housing bubble appeared to vindicate many of their views and then the economic recovery proved many of their dire predictions completely wrong.  I think Austrian Economics is deficient and Austrian Business Cycle Theory is inherently flawed and built on misunderstandings about the way the modern monetary system actually works.  Allow me to provide three core reasons why I believe this:

1)  Austrian economics is a political ideology that masquerades as an economic school of thought.  Like most of the economic schools in existence today, Austrian Economics is predicated on a political ideology.  Austrians tend to be vehemently anti-government and pro-market.  So they build a world view that conforms to the world they want and not the world we actually have.

We’ve seen this time and time again in the last 5 years during the recovery as the government picked up spending when the private sector cratered.  There is always an excuse within Austrian Economics that implicitly assumes government cannot spend dollars any better than a household.  This might be true in a general sense, but it is not always true.  For that implies that households and businesses always make rational decisions.  As if choosing to have our government spend money on wars and welfare is all that much different than households spending money on the next release of the tech gadget they probably don’t need or the McMansion they can’t afford.

Austrians aren’t the only offenders of this (see here).  We see it in Keynesian approaches, Market Monetarist approaches, Monetarist approaches and just about all of economics these days.  Economics is built primarily on a bunch of political agendas designed to look like a science.  Austrians (particularly the Rothbardians) are so vehemently against government involvement in the economy that they are among the very worst offenders of trying to pass an ideology off as a school of thought.  It results in a very unbalanced presentation of our reality.

2)  Austrian Business Cycle Theory Misunderstands Endogenous Money.  Like many other economic schools of thought, Austrian economics is predicated on a loanable funds model with a world view designed to demonize just about everything the central bank does.  As I’ve explained before, the primary purpose of the central bank is not a conspiratorial attempt to enrich bankers, but to help oversee and regulate the smooth functioning of the payments system.

The act of targeting interest rates and implementing monetary policy are very much secondary to this primary purpose and the powers of such policy, as presently constructed, are vastly overstated by most economists.  Yes, the central bank controls a component of the interest rate that helps determine the spread at which banks can lend, but the central bank does not determine the rate at which banks borrow to customers.  It merely influences the spread.  Overemphasizing the Fed’s “control” over interest rates misunderstands how banks actually create money and influence economic output.

The primary flaw in the Austrian view of the central bank has been most obvious since Quantitative Easing started in 2008.  Austrian economists came out at the time saying that the increase in reserves in the banking system was the equivalent of “money printing” and that this would “devalue the dollar”, crash T-bonds and cause hyperinflation.  It was standard operating procedure to see charts of the monetary base like this one followed by dire predictions of high inflation or hyperinflation.  Of course, none of this actually panned out.  The high inflation never came, the hyperinflation definitely never came, the T-bond collapse was a terrible call and the USD has remained extremely stable.

So why was Austrian economics wrong on this point?  Because their model is predicated on the same faulty loanable funds based model that most other economists use.  So they assumed that more reserves would mean more “multiplication” of money and thus hyperinflation.   Of course, as I’ve explained numerous times here before, banks are never reserve constrained and do not make loans when they have more reserves.  Further, QE is a simple asset swap that changes the composition of private sector assets.  Referring to this as “money printing” is highly misleading (see here for more details).  Austrians got this wrong because, in an attempt to attack government, they have devised a government centric view of money creation that misunderstand the way money is created primarily by private competitive banks endogenously.

3)  Austrians misunderstand inflation.  Austrian economists actually change the definition of inflation to serve their own ideological needs.  In Austrian Economics inflation is not the standard economics concept of a rise in the price level.  Inflation in Austrian economics is just a rise in the amount of money.  This leads to all sorts of emotional commentary, the most common of which, is the idea that the USD has declined 95% since the creation of the Fed in 1913 (which is true).   But this misunderstands several concepts and misleads us in understanding how the monetary system works.

First of all, the private sector creates lots of “money like” instruments that are not technically included in the money supply but comprise the vast majority of private sector net worth.  I use a “scale of moneyness” to help better understand this concept so that we don’t place an undue specialness on the idea of “money” when trying to understand inflation.  Instead, I try to explain that spending is a function of income relative to desired saving.  And that saving is comprised not only of “money”, but money-like instruments like stocks, bonds, options, etc.  To completely understand how the economy is impacted by inflation we shouldn’t merely focus on narrow definitions of “money”, but should understand the aggregate economic balance sheet.  For instance, if you sell a stock at no gain and obtain cash you’re not necessarily more likely to spend than you were before because your net worth is the same.  Your income relative to desired saving is precisely the same as it was before.  This is basically what QE is.  It is a swap of one type of asset for another and doesn’t actually alter the net worth of the private sector.  Changing the moneyness of private assets does not necessarily mean there will be higher inflation!

But there is a more egregious and nefarious error in this “decline” of the dollar myth.  It completely misunderstands how living standards can rise even while the money supply rises.  In our credit based monetary system the money supply rises primarily when banks make loans which create deposits.  In a highly productive economic environment these loans are distributed by private competitive banks and provide the borrower with the capability to invest in a manner that actually enhances the living standards of society.  So, you borrow $100,000 from the bank, you invent and distribute the washing machine and suddenly we’re all better off because we no longer have to go to the river to wash clothes.  The technological advancement enhances our lives by giving us more time to consume and produce OTHER goods and services.  In other words, the money supply has technically increased, but we’re not worse off because of it.  We’re better off because of it!  What’s happened since 1913 in the USA is just one gigantic version of the washing machine example where our living standards have exploded through the roof in tandem with a rising level of credit and an innovation boom that human beings have never come close to experiencing in the past.

Austrians, in their fervor to demonize the fiat money system, make several errors here.  First, they assume the government controls the money supply (which they don’t).  It’s actually controlled primarily by private banks in a market system that Austrians should love.  Second, they move the goal posts on the definition of inflation to imply that inflation is always and everywhere a bad thing (which, it can be, but generally isn’t).

That really just scratches the surface on some of the flaws in Austrian Economics.  I think Austrians provide some good insights on the way the economy and money works, but these are glaring flaws in the school of thought that render it highly inadequate in helping us understand the world of money in a balanced and objective way.

See also: 

Understand the Modern Monetary System

Monetary Realism Recommended Reading

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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Comments

  1. I always thought Mises separated loans from vertical money. He viewed credit as noninflationary over the business cycle as overexpansion is followed by over-contraction so no biggie. Money supply increases that he worried about are central bank/ and or government issue to counteract credit collapse in a recession/depression. Those he viewed as noncyclical and therefore inflationary. Hard to argue with it as preventing deflation in half the cycle is inflationary longer term (since inflation in an expansion is rarely fought by central banks to the same extend that they fight deflation :). I agree with you that the hyper- inflationists lost this one though.

  2. Verizon looks they are going to create around $50 billion of new money-like instruments :)

  3. Mises was wrong. He was using a loanable funds model where credit is extended from existing money. Loans create new money. They don’t come from existing money. That’s what Mises missed.

  4. Another way to contextualize that 1913 dollar-value time series would be just to point out that average *real* incomes are ~500% higher now than then.

  5. The biggest problem I have is that Austrian economics has a horrible way of dealing with the international linkages between countries. Every single financial crisis I can ever think of is primarily due to international imbalances, which very few Austrians seem to understand.

    I also haven’t met a single Austrian that understood the difference between national savings and household savings and how those two are often inversely correlated.

  6. Reductio ad absurdum Cullen, reducing the school of tought of Austrians to Von Mises, is, in my opinion very short sighted, to the same effect that some of the points that Keynes put forward are valid. What about the Cantillion effect? What about Jacques Rueff understanding of money and the monetary system? What about Maurice Allais? In what box do you put Schumpeter?

    As far as I am concerned, If economy is a religion then I am agnostic, but I do believe that, there are some points which are valid in some theories, Austrians included. For instance the debt deflation theory put forward by Irving Fisher is fairly close to the Austrian Business cycle theory in the analysis of the boom and bust cycles. What is wrong with that?

    Best,

    Martin

  7. It appears to me you are mostly addressing Misesian and Rothbardians sub-school here. Menger, had an endogenous view of money.

  8. Mises, Hayek and Rothbard dominate Austrian thought. The views of Menger, Cantillon and other Austrians do not deviate far from the core principles. That doesn’t mean there are no good insights in Austrian econ, but I do think some of the core principles and understandings are flawed. This is a blog post. Not a comprehensive paper on the entire Austrian school so unfortunately, some generalization occurs.

  9. Menger was a metallist who misunderstood that the medium of account was determined by the state and that the state determines who can create credit money within the payments system it regulates:

    “Money has not been generated by law. In its origin it is a social, and not a state institution. Sanction by the authority of the state is a notion alien to it.” Menger, Carl, 2007. Principles of Economics

  10. Yes I agree in a blog post generalization do occur, but the issue I have here is that all is not black and white, and while some economists like Mises is associated with Austrians, it doesn’t mean Austrians ideas are flawed in general, some are, some not. For instance Rueff and Keynes who werer bitter opponents agreed on the imbalances that Bretton Woods led to by giving the US dollar a leading role. Keynes was a proponent of the Bancor, to that effect. Rueff, wrote The Monetary Sin of the West clearly explaining the risk of imbalances. What I mean is that, in different school of thoughts, there are some valid points, even in the Austrian Business cycle theory.

  11. Cullen, you’re a brave man for bringing the wrath of Austrian internet trolls down on you (and yes, it will come). But this was a post I’d been waiting for you to write for years. It’s time for the Austrians to just go away and stop influencing people’s thinking.

  12. MR gets the banking system right, gets the idea of Net Financial Assets right (although it could go further and admit that T-bonds are ‘money’) but when it comes to policy prescriptions, we hear the same crude admonitions that pumping more money into the system will grow the economy and make everything all right. More gas will make the car go faster.
    Economic historians will look at the U.S. and see a country with resources, rule of law, an orderly society, immigration, education, fairness, free trade etc., etc. — none of these things ever enter the vernacular of modern economics.
    We’er seen in the past decade that without some kind of budgetary discipline, government will spend too much and mess things up (goofy wars, allocating resources to old people instead of children, stimulus packages for party faithful); also, without some kind of market discipline, banks will create too much money (lending money to deadbeats and then leveraging that loan 10 times over) and mess things up. That’s what we’ve seen in the past decade.
    It’s time to go back to basics and build an economy from the bottom up and keep the economists out of it.

  13. Actually, they’re not that close. A straw man is a flawed argument. Reductio ad absurdum is a technique for exposing a flawed argument.

  14. Exactly, that is what I meant, they are close but reductio ad absurdum is more precise, given Cullen went through a demonstration. Qui erat demonstratum.

  15. I wrote a post about this recently and forgot to publish it. Minsky’s FIH was based on inherent fragility and innovation by capitalists and bankers which would break down the govt’s influence to reign in risk takers. Hayek’s position was not just against banks, but against the entity he thought dominated them – the central bank. So they’re quite different views of the world even if they appear similar….

  16. I agree here. I think Cullen tries to walk a fine line as a non-economist so that he doesn’t annoy too many economists. But the economists are the problem and the MR guys, as non-economist financial professionals have the exact right views and experience to create an entirely new paradigm. But that requires a war against the economics profession and an outright rejection of non-practitioners like most academics. And I think Cullen’s too nice to go down that path even though it’s the path he needs to go down.

  17. Brett was hugely influential in developing MR so it’s not quite right to say MR just jumped out of the brains of a bunch of non-economists. Plus, it would be pretty shitty of me to try to claim to not having learned a lot of this stuff from economists….MR has some pretty unique and original insights that we alone created, but it’s also largely influenced by other schools and past economists….

  18. Another point, which might interest you. The later (false) Austrians can’t even agree on a definition of inflation among themselves. The Miserians disagree with the Rothbardians.

    The former say inflation is an increase in a money supply. The later the: process of issuing money beyond any increase in the stock of specie, may be called inflation.

    Here’s my take on the whole inflation semantics thing: http://benrizzo.wordpress.com/2013/08/08/the-war-of-semantics/

  19. how does MMT et al alternatives to Austrian explain what in modern times appears to be an ever increasing tax payer burden, coupled with inflation, coupled with increasing corruption in gov’t and banking?

    as a laymen, the austrian school jumps out because I think it is easier to grasp, which is probably wrong, but at the same time, i don’t see the other schools addressing the tight coupling of gov’t and banking.

    when gov’t and banking take us to hell, where do we turn for solutions?

  20. I am a supporter of the school of Austrian economic theory….That being said, no school will ever have all the economic answers…

    This was perhaps one of your best threads ever, Mr Roche; as is was a delight to read.

    A single minor point of contention, the different between the efficiency of private spending vs government is the former earned it and the latter – well you know the rest of the story…

    May I add this salient point, there is more than likely less political consideration with private spending, than most form of government spending and thence the grave fears and concerns by the Austrian…

  21. Answers to your points:

    1) There is so far no proof that central planning works better than private markets.

    “As if choosing to have our government spend money on wars and welfare is all that much different than households spending money on the next release of the tech gadget they probably don’t need or the McMansion they can’t afford.”

    Well, there is. First – it is free choice vs. coercion. Second – people can learn from their mistakes. The state on the other hand operates with OPM and nevere learns.

    We have had a long period of increasing state intervention in the economy and it has worked well on the back of the growing debt / GDP cycle. When this reverses (like in 2008), you better watch out. This time around govts picked up the tab. But there will be a limit to that as well. And if not, welcome to the USSA. There is no free lunch of Keynesian stimulus – the hidden price is rising debt / GDP and rising govt share of GDP, and rising income inequality (maybe you get no socialism, but fascism).

    2) The monetary system model is adjustable in the Austrian School. See Pater Tenebrarum at Acting Man uses a model that is the same as MR.

    “the primary purpose of the central bank is not a conspiratorial attempt to enrich bankers, but to help oversee and regulate the smooth functioning of the payments system.”

    The CB pretends to do that, but its real purpose is exactly to enrich bankers.

    “The primary flaw in the Austrian view of the central bank has been most obvious since Quantitative Easing started in 2008. Austrian economists came out at the time saying that the increase in reserves in the banking system was the equivalent of “money printing” and that this would “devalue the dollar”, crash T-bonds and cause hyperinflation”

    Not all Austrians did that though. The ones that did have not the proper financial system model, it is true. But neither does Nobel prize winner Krugman for example.

    ” Referring to this as “money printing” is highly misleading”

    It may be misleading for people who do not understand what is meant. Has QE direcly increased deposits or not?

    3)
    “In Austrian Economics inflation is not the standard economics concept of a rise in the price level.”

    I hear that the Austrian definition is what was used in the past, before the term was distorted into a CPI level increase. Austrians use the initial concept, because they know that a rise in money supply may not show in the CPI, but in the prices of assets as well. Something that we have seen since the start of QE.

    “Changing the moneyness of private assets does not necessarily mean there will be higher inflation”

    Here it is you who suffers from misunderstanding. QE is not changing the moneyness of private assets. It is decreasing the attractiveness (marginal utility) of cash plus deposits and increasing the attractiveness of everything else.

    “But there is a more egregious and nefarious error in this “decline” of the dollar myth. It completely misunderstands how living standards can rise even while the money supply rises”

    Nobody says that there are no productivity gains along the way that so far luckily have overwhelmed the negative effects of excessive inflation of the moeny supply. Besides we are probably at mid-cycle or actually still at the rising part of the debt/GDP cycle. If you do not pay attention to this, then check Ray Dalio or Sornette. Besides – the industrial revolution exploded in the 1800s as well with a flat CPI for a century. Average real GDP growth back then was much higher than during the last 20 years of increasing central planner’s intervention.

    “It’s actually controlled primarily by private banks in a market system that Austrians should love”

    Some Austrian know this pretty well (see above). Austrians do not love that someone is given a legal right to commit fraud and they do not like the unlimited credit exapansion as it creates booms / busts, redistributes income to the fraudsters, turns the country into a corporatocracy etc.

    -> Look, you can open your eyes for the good parts of Austrian economics or stick to your (Keynesian) dogma.

  22. I think Mises actually knew that loans create deposits. These he called fiduciary media, so he knew it.

  23. whether AE is flawed or not – i still maintain the view that the only reason MR works is because of other economic theories out there that require some kind of spending discipline.

    as soon as politicians realize that “the US can´t go bankrupt” and there´s some kind of free lunch – it´s game over.

    to quote Cullen: “The US government’s constraint is not that it will run out of funds, but that it could supply too much liquidity to the private sector thereby causing inflation. So the US government’s real constraint is inflation and not solvency.”

    it´s like society and crime. people know that they should shouldn´t harm others in any way to make society work. we know that we can be peaceful as evidenced by 99.x% who do nothing wrong in their daily lives.
    yet it still wouldn´t work without a legal system and police enforcement beause selfishness (that includes a tendency towards crime in certain situations) is in our genes.

    so to me this “balance of power” between old and modern schools is essential. the “bad cop” makes sure the good one can work ;)

  24. “there is more than likely less political consideration with private spending, than most form of government spending and thence the grave fears and concerns by the Austrian…”

    First, I dont think that is true. All private spending is done politically. Not on politics per se but choices that are made about where to spend, who to buy from are influenced by your politics. You dont usually buy from people you dont like. Your spending choices reflect your politics. Its impossible for them not to. And in aggregate private spending is 3-4x what govt spending is.

    Much of govt spending is across the board transfers, across the board tax cuts/hikes. One president might be more oil friendly another more alternative energy friendly but these are usually small portions of the budget. The largest portion of the federal budget is probably spent a-politically, in the sense that it is not done as political favors

  25. Well, this is a nice advertisement as to why not to place any money under your control or follow your advice. Thank you.

  26. Cullen said QE wouldn’t cause hyperinflation, collapsing dollar, or surging interest rates. He’s one of the few analysts in the world who has understood QE since it started. And I don’t know any macro analysts who have been more right about the environment of the last 5 years than he has. The real losers have been the people who fell for the Austrian trades of hyperinflation, declining dollar, and falling bond prices.

  27. This is the best one can do the rebut Austrians ?

    1). Duh ?! How is this relevant to anything ?
    We do we care whether it is an ideology or not if it works ?
    As to your spending claim – you are essentially making an Austrian argument – everything depends on the specifics of individual transactions, generalizations are problematic.
    I do not think there is any group that claims government ALWAYS performs some economic task worse than individuals. Just that they usually do – which you appear to accept. Beyond that we have no rational basis to evaluate when government is able to make better decisions than individuals. Given that government is generally worse, that there is no principle that allows us to determine when government will choose better, the wise decision would be to leave government out of the process.

    2). Try returning to Adam Smith rather than Austrians. The wealth of a nation is what it produces. Any theory of money that ignores that is inherently flawed.

    3). The triumph of semantics over substance. Variations in money supply, particularly government money supply have particular economic consequences. Variations is non-government paper have somewhat different consequences, and variations in prices have other consequences.
    i am not sure how a different definition of inflation magically negates the austrian understanding of variations in government money.

  28. So the Verizon bonds are now trading in the after market. There were a number of traunches but, on average, the $49 billion bonds are probably up in price by around 3 percent. Please correct me if I’m wrong, but I think this means that the net worth of the non-corp private sector just increased by around $1.5 billion in a split second. And no govt spending was involved.

  29. I understand that the ideas don’t work given the current system, but I’m wondering if you think the Austrian model would be better, as you’ve defined more time, then the current system if America had never changed and we still operated late 19th century, Carnegie, JP Morgan style.

  30. Well, that technically happens every day. But remember – all securities issued are always held by someone. The aggregate pvt sector might be 3% wealthier than yesterday, but the aggregate pvt sector can’t “cash out” of these securities. Someone ends up holding them no matter what happens until they are retired. So we can’t all reap the rewards of capital gains even if they are showing on our balance sheets. BUT, improving balance sheets makes us more creditworthy which means we might be able to borrow more. So there’s a side effect in the credit markets to this sort of thing….

    Personally, I think a big part of understanding MR and the monetary system is understanding how the pvt balance sheet is mostly comprised of these types of financial assets. So many people get paid in stock, warrants and options these days that it’s insane not to consider the moneyness of these assets when considering a model of the economy. Our balance sheets are mostly made up of these kinds of assets so you have to understand them if you’re going to understand the economy.

  31. You didn’t really explain the most important question of the post, which was, why did Austrian economics get everything in the recovery phase entirely wrong? If you can’t answer that then you haven’t really responded to my post.

  32. Well, I think that’s part of what makes Austrian econ flawed. They love to cite the 1800’s and the era of the gold standard and claim that things were better then. That’s all well and good, but that’s theorizing about a world that was or could be and not the world that is. This is a big reason why I reject Austrian econ. They don’t actually explain the current system as it is so their ideas are largely prescriptive and political.

    Monetary Realism is all about being able to explain what IS RIGHT NOW so we can better understand it. Some people in this thread have pointed out my track record of correct macro calls. I don’t think it’s a mere coincidence that I have worked tirelessly to understand what is while having made some pretty accurate macro calls over the last 5 years. I don’t theorize about what could be. I focus on what is so I can understand how it impacts the world we live in.

  33. It doesn’t happen every day on this kind of scale! But your points are well taken. Someone must hold these securities.

    And agreed that when people hold a large part of their net worth in vehicles other than cash or deposits, these vehicles should play a prominent role in any economic model. It also means that traditional “money supply” measures just don’t tell us the whole story. Not even close.

  34. As I said above – you can easily insert your MR system in Austrian economics. Austrian economics is more about economic principles and how to think about economics (methods) than a description of a institutional framework (which MR is).

    So principles and methods are adjustable to any existing system as it evolves.

    Look at Pater Tenebrarum at Acting Man. His view of the way the monetary system operates is not different than yours (at least in the basics).

  35. Yeah, MR is mainly just a description of the system so you can take MR and then apply whatever political ideology you want to it. That’s kind of the point of MR. MR is just a foundation for understanding how things work. So you can understand MR and then apply an anti govt position to it. Or you could go the other way and apply a pro govt position to it. I don’t really care how you use it. But the point of this post is to point out that, Austrians get big core understandings of the way things work at an operational level, wrong.

  36. “In other words, the money supply has technically increased, but we’re not worse off because of it. We’re better off because of it!”

    Tell that to the many who are unemployed now and are paying higher prices for commodities as a result of that of all this excess, inflation financed, government spending since 2003. The employment picture is not getting better.

    I’m with the Austrians. We need Laissez-faire. Capitalism is about free market production; not expropriation and manipulation by a central bank beholden to the national government. Government intervention in the economy has been disastrous and with Obamacare on the way, the economic picture for this country is about to get much worse.

    I can understand why your site is called “Pragmatic Capitalism”. Your idea of capitalism has nothing to do with the absolute values of freedom and individuals rights, on which capitalism is dependent on.

  37. It’s called “Pragmatic Capitalism” because I don’t live in a fantasy world where there is no govt, “absolute freedom” and a bunch of rugged individualists paving the way on their own. We live in a highly socialized economy with a substantial govt. You live in a lala land and envision a world with no govt and a bunch of Robinson Crusoe’s making something from nothing.

    Look, I run my own companies. I earn every single dollar I make. I work my ass off for it. I am your prototypical rugged individualist. But I don’t live in your fantasy world. I realize I never could have achieved the things I’ve achieved entirely on my own. I know that there are millions of people around me providing an incredible support system. Is it perfect? Of course not. But it wasn’t built on my back. You appear oblivious to this. There is no such thing as a “self made man”. It does not exist.

    I am sorry, but you need to wake up to reality. Our govt is substantial and it’s not going away. We can quibble over the size of it, but the fact is, when it comes to cutting the size of govt almost NO ONE actually wants to cut the size of govt because we’re all indirect beneficiaries of various programs whether it’s the police force, the military, the social security payments, etc. Do you benefit from our govt at all? Do you use public roads? Do you ever call 911? Do you appreciate our military? Do you receive social security? Do you own government bonds that pay you interest? Do you want to cut all those things? Get real. Stop living in a fantasy. Pragmatic Capitalism is about understanding the great system we’ve designed. The system that has created ungodly wealth and a living standard that makes EVERY SINGLE AMERICAN IN THE TOP 1% OF GLOBAL WEALTH.

    Is it a perfect system? Of course not. Has it proven itself superior to just about every other system man has made? Yes. Could it be improved. Probably. But I guarantee you one thing – no single man or woman will make it better on their own. It will be a group effort and not one based on your Robinson Crusoe myth. So get out there and innovate and create. But just remember that you’re not alone and try to appreciate all the great things that this capitalist system has provided for us all.

  38. If you don’t understand the difference between a consumer choosing a mcMansion or ridiculous high-tech gadget and the government choosing between war and welfare (guns or butter) then there’s not much point in attempting to teach you the Austrian business cycle theory.
    You might want to start by looking at the Fed’s own report that showed QE2 spending of $600billion (4% of GDP) led to a .13% increase in GDP. So much for the efficiency of government spending. And btw, where exactly is this “recovery” you speak of? I’m sure the discouraged (those that have stopped looking for employment) would love to know.

  39. “Pragmatic Capitalism is about understanding the great system we’ve designed. The system that has created ungodly wealth and a living standard that makes EVERY SINGLE AMERICAN IN THE TOP 1% OF GLOBAL WEALTH.”

    Here we have that “American Exceptionalism” again. Wealth ? Agree. But on the credit side of the ledger total US debt is about $ 57 trillion. Is that wealth as well ? Nope.

    US citizens don’t have a clue how lucky they were between 1990 and 2008. But all that wealth is going to dissappear much faster than it was build up.

    The government isn’t that hated as a lot of people say & think. I would put it this way:
    Republicasn have a habit of bashing government but as long as a lot of Republicans want to be elected for Congress of want to become President then the gov’t isn’t that unloved at all. If there wasn’t any Republican that wanted to run for President then I would start to worry for the future of the US government.

  40. Isn’t it a much larger condemnation of Austrian economics that they reject the greatest invention ever made by the human race: the scientific method?

    The Aristotelian model that one can simply reason about reality and come to valid conclusions has been proven wrong *so* many times that it’s utterly absurd that anyone still believes it.

    There’s conservative, and then there’s fossilized.

  41. I suppose you think the spending on McMansions was “efficient” because it was based on decision made by individuals and not the govt? Or would you rather blame the govt somehow for all those homes that were bought? That was the boom portion of the credit cycle that Austrians complain about. Was it all fraud, banksters and govt just forcing us all to buy homes? Is that your explanation?

    As for the “recovery” – well, GDP is 15% since 2008. The unemployment rate is down 2.5%. We’ve recovered 80% of the jobs lost since the 2007 peak. You are still selling your losing fear trade. You Austrians have been wrong about almost everything for 5 years running. Are you really still pitching this fearmongering nonsense? You expect the rest of us to fall for your political claptrap about how the govt is causing the end of the USA ? Give me a break. Lots of other people might fall for you political charade, but not me.

  42. Household net worth in the USA is 70 trillion. That’s larger than the global economy. The average American wage puts them in the top 1% of global wage earners. Don’t try to sell me this nonsense about how Americans have it so rough. There’s a lot more unemployed people out there than we should tolerate, but don’t, for a second, try to tell me that the average American is living in hell.

    America is an exceptional economy. I hate to break it to you, but that’s the reality. The facts don’t lie!

  43. Ummm… The American population is ~314 million, which is around 4.5% of the world population, so it’s logically impossible that the average American is in the top 1% globally.

    Which is not to say that we have it tough, of course.

  44. I wouldn’t look to a school of economic thought of any stripe to solve issues of corruption. The failure and capture by plutocrats of the American political process is not an econ 101 issue.

  45. They aren’t close at all.

    If you want to see reductio ad absurdum in action, look at some examples in mathematics (such as the classic proof that the square root of 2 is not rational).

    Reductio amounts to assuming P is true, showing that assuming P results in a contradiction and then concluding P must be false.

    Straw man is all about constructing a weaker argument than one your opponent would make and then knocking that easier argument down.

  46. Please post it then :)

    I’ve only skimmed his lectures as I haven’t had the time to sit down and go through it.

    The portions I read indicated that he was open to the idea that the cause didn’t have to come from central bank policy. I’d be interested in your take on it though.

  47. The average US wage earner may be in the world’s top 1% but their expenses are also very high. It’s the result of, among others, US protectionism.

    “The facts don’t lie” ?? Like all those other fake numbers the US government is spewing out ? Fabricated things like GDP, Inflation, budget deficits, etc. ? Never heard of “Hedonics” ?

  48. Right. When in doubt just claim that the US govt’s numbers are all fabricated even though you can’t come close to proving such a claim. The US govt is the most transparent govt in the world. You won’t find a single govt that provides more online and transparent data than the US govt. So, I guess we’re the most transparent in a world of fabricators, which, in relative terms, makes the USA top of the heap again. :-)

  49. What is it that you think Austrians got wrong ? And why is it that you think you post demonstrates Austrians got things wrong ?

    We have made poor choices and gotten a poor recovery.
    I think that is consistent with Austrian economics.

    You seem heavily fixated on monetary issues, as if that is all economics – particularly austrian is about.

    I would concede that many, including some austrians predicted inflation. significant inflation has not occured – though inflation fears are still very high and not just among austrians.
    Further you presume that the effects of monetary inflation have to be immediate rises in the consumer price index.
    We have clearly exported alot of inflation to the rest of the world, particularly the mideast. We have our stock and bond markets running in tandem rather than as normal at odds. We are arguably seeing inflation in those alternate forms of money you discuss.

    Through out your blog you make innumerable claims about austrian economics that are either false or at best consistent with the ouji board predictions of a few who are identified as austrian.

    Most Austrians do favor private money over government money.
    The modern economy does have more private or quasi-private money than ever before – though arguably government manipulation of the government money supply still has significant influence on private money.

    Many Austrians and others predicted inflation as the consequence of the stacked QE’s. Though i would note that even Hayek claimed that given a government monetary regime, it should be expansionary in response to a downturn.

    Regardless, you claim austrians mis-define terms such as inflation and then claim that by your definitions we did nto get their predicted results.

  50. Is it even deniable that Austrians broadly claimed the US govt’s recovery policies would not work? That they would cause high inflation? That they would cause rising interest rates and a collapsing USD? Yet here we are 5 years later and GDP is at an all-time high, 80% of the jobs have been recovered, household net worth is at all time highs, etc. Is it a perfect recovery? No. I’ve said that for years. It was an unusual recession so the recovery has been unsual. But that doesn’t mean the Austrians were right. In fact, everything the Austrians predicted was wrong. Interest rates fell, the USD has been flattish, the stock market soared, GDP rose, inflation remained low, etc. The Austrians have not been right. They have been totally wrong.

    Where is your data proving that things are so terrible? Do you have anything to cite other than the participation rate and welfare recipients? Do you read any website other than the typical fearmongering fools who have had everything wrong for years yet continue to fool people into thinking that their political claptrap is worthy of being read? Where is the evidence that the Austrians were right? Is there any?

  51. I thought Austrian economics rejected empiricism, predictions, and inductive logic (i.e. the basis of science) and instead relied on “narrative” from “self-evident” “axioms” that they came up with by thinking about it. I.e. they use “praxeology” based on “irrefutable” concepts such as “Human Action,” etc.

    http://rationalwiki.org/wiki/Austrian_school

    http://rationalwiki.org/wiki/Fun:Austrian_school

    I realize this all makes Austrian economics unfalsifiable … but unfalsifiability is generally considered to be a bad thing. In other words, no matter what happens, the Austrians are right by definition. No?

  52. You mean the guy who, in this October 2008 article, predicted:

    1) Hyperinflation
    2) Surging interest rates
    3) Collapsing dollar
    4) Collapsing US Economy
    5) Collapsing stocks

    This guy got everything wrong for 5 years. How can anyone apologize for his predictions? It’s just absurd….No none on the planet has been more wrong about markets and the economy for the last 5 years. No one. And I track this stuff incredibly closely. I can’t think of a single person who got more wrong!

  53. Cullen, I respect that you make an effort to respond to most posts, unlike other bloggers. As such, I respectfully disagree with your viewpoints. We are not in a recovery, we are in a topsy-turvy twilight zone of an economy, where wrong is right, and right is wrong. For every one full-time job lost, a portion is replaced with two or more part-time jobs for much lower pay and no benefits for the same person. Another portion is replaced with a person that goes on social handouts rather than working. The amount of debt is growing far faster than the amount of GDP by far, the inflation rate is calculated in an incomplete way, which causes it to be understated (everyone knows it so stop trying to deny it). Your govt spends massive amounts of money to spy on its own citizens – why do that if everything is hunky-dory? You are trying to fit the current situation to your theories, but the current situation is not sustainable – just like the “empire” of Britain was not sustainable. This illusion over the past five years which you call a recovery is due only to the fact that the USD is the least ugly currency at the moment, so this priviledge is being squandered. Our education system is churning out mostly Arts majors, while Asia churns out hundreds of thousands of engineers every year. Sure, Hollywood makes some excellent tv series, but that’s not enough to sustain this empire. We may continue to live on this borrowed time for many more years, but the more debt we rack up and the more currency we print, the greater the cataclysmic fall will be, when our currency no longer buys all those imports we get. But hey, keep up the good work and the positivity! Ultimately, the future will show which side was right, and the internet documents predictions indefinitely.

  54. …hmmm, guess I hit a nerve there eh Cullen. While I have neither the time nor inclination to rebut all your erroneous claims, I do have a couple of comments:

    The idiot buying the mcMansion does so because he makes that choice. No one forced that house on him. The money is his – he earned it – to do with as he pleases. The government, on the other hand, has taken money from all of us (and our great grand-children by now) at the point of a gun. This is money that is, now, not available to the private sector. Do you really not understand the difference?

    Your claim that the Austrians have been wrong about everything is utter nonsense. The 2000 dotcom and 2008 real estate bubbles are classic ABCS examples. Who was it that set up Fannie and Freddie, kept interest rates too low for too long and encouraged “the American dream – individual home ownership” for everyone? I never claimed the 2008 bubble was fraud – it was bad government policy, plain and simple.

    You really need to read more. I suggest Meltdown and This Time is Different for starters.

  55. I was thinking the same thing! The power of Schiff’s brand of Austrian economics lies squarely in his ability to stare straight into the camera and boldly (and loudly) say what he “needs” to… regardless of how ridiculous it is. He’d better do that! It’s literally his job… the more he produces “confidence” by projecting confidence the more business he gets! … that’s my interpretation of his “business model” anyway.

  56. Trust me, my nerves are impervious to the emotional ranting of Austrians. I’ve been tuning you guys out for the better part of a decade now.

    Let’s get some basics down while we’re at it.

    1) The housing bubble was primarily due to people BORROWING money they did not have. The housing collapse occurred because banks lent more than borrowers could repay and because banks leveraged their balance sheets more than they could afford. This was not about rational individuals using the money “they earned”. It was almost entirely about irrational gamblers using money they never had. You misunderstand the most basic concept at the heart of the last business cycle.

    2) The govt is a big redistributor of money. It does not take money from you and lock it up in a safe. It takes money from you because “we the people” voted representatives into office who then chose to take that money from you and give it to someone else. There was no “theft” involved there. That’s just politically charged rhetoric that you use to try to scare people who are too lazy to investigate how the system works. Unfortunately, your screaming and language works on some people which is a real shame because we’re all worse off because of it.

    3) Right on cue. The Nasdaq bubble and housing bubble were caused entirely by the govt. Yes, that may have contributed, but it’s 100% unadulterated nonsense to blame the govt entirely.

  57. As a side note, I think Hayek objected to alleged a priorism of Austrian economics.

    But regarding your latter question:

    In other words, no matter what happens, the Austrians are right by definition

    I’ve been meaning to explore this issue further but haven’t gotten around to writing on it yet. This part can be objected on multiple grounds.

    1) Just because a system follows from definition doesn’t mean it has any application to reality. Consider the fact that the game of chess follows from a strict set of rules and definitions.

    2) Many arguments that Austrians make don’t follow from their definitions So they are either not being consistent with their definitions and/or they are assuming a variety of things about human behavior and calling these “definitions”.

    Broadly, I think von Mises conflated a priori with model building. To be sure, model building is not inductive .But von Mises wrongly concluded from this that model building wasn’t “empirical”. He then claimed his “human action” is deductive (well, it is to some extent, but where do the assumptions of the model come from?)

    A word that may not have been in von Mises’ vocabulary (which unfortunately that doesn’t get used enough) is abduction. And I think that would better describe how good model building/testing works. And that’s also why none of this is going to be a priori.

  58. Agreed.
    Median income is down, median net worth is down.
    Sustainable is the key word — what we have is not sustainable.
    I do agree that the United States is the greatest country in the world and I will wave the flag as proudly as any man. But that doesn’t make today’s policies smart.
    MR describes a system in which money is created for the upper 1 percent through bank lending backed by government (bailouts, Fed purchases of MBS). I think Cullen crosses the line a bit when he *defends* that system instead of merely describing it.

  59. The financial crisis was caused by the banks leveraging those loans. No leverage, no crisis.
    The people who borrowed money they could not afford, or bought houses they couldn’t carry — they’ve been punished.
    The institutions who made those loans -and then amped up the leverage – they got bailed out.
    Those of us on the sidelines — we’re working in a difficult economy in which our fellow citizens are making less money and are eating their assets.
    Which is cool — life is full of ups and downs and we’ll deal with it.
    But we don’t enjoy hearing lectures about how great things are because the government allows the financial sector continues to create a lot of money for the 1 percent.

  60. You confuse wealth and money.

    An increase in the supply of money does not make us wealthier.

    Whether it is a 3% 30% or 300% increase, whether it is private money or government money.

    We are only wealthier when something we want or need is produced that was not there before.

  61. This is totally unbalanced! The private sector received trillions of dollars in aid via govt spending for 5 years straight! How can you say the bankers were bailed out and the rest of us got nothing? The bankers mostly just got short term loans from the Fed which they had to pay back. And the interest from those loans was passed on to the US Tsy where they spent it to some other pvt actor. The banking system was not the only system bailed out here. Households have been propped up by govt spending to a massive degree.

    You’re doing the same thing the Austrians do by presenting this in a totally unbalanced and biased way….

  62. As a whole we are neither worse nor better off because the money supply has changed.

    Our circumstances improve when more actual wealth – something we want or need is produced.

    Changes in money supply though they may benefit some and harm others, are zero sum, as they have no effect on our real wealth.

  63. No, you confuse money, financial wealth, real wealth & real goods and services. We can definitely produce something “that was not there before” and become less wealthy. See the 2006 peak in housing when millions of housing units were built that “were not there before” and then caused the implosion of the economy.

    But it’s better to define these things more precisely. Money is just the medium of exchange and can comprise a portion of our financial wealth. Financial wealth is just a claim on real goods and services. Our financial net worth is our assets minus our liabilities. Real wealth is something entirely different. Real wealth is not real goods and services. Real wealth is time, health, friends, family, etc. We try to build financial wealth to find real wealth and “money” is just one tool we use in that endeavour. But that does not necessarily mean “owning” real goods and services. In fact, it could involve very little real goods and services.

    I know perfectly well that money and wealth are not the same thing. But you seem to have this myth that “wealth” is more houses and more real goods. Which totally misses the point of life in a monetary world.

  64. “We are only wealthier when something we want or need is produced that was not there before.”

    Sounds to me like you endorse China’s building of cities in the middle of nowhere. You must think the Chinese are so rich with their central planning programs building so many cities that didn’t exist before!

  65. You are critiquing Austrian economics, not Anarcho-capitolism.

    You are attacking a fantasy of your own creation.

    Even your fantasy attacks suffer logic problems.
    That we do not live in this zero government fantasy land does not ipso facto make the world we live in superior, nor does it say anything about the myriads of alternatives inbetween.
    Nor does the existance of some service provided by government prove that service can only or best be provided by government.
    Nor does the fact that some of us receive beneficial services from government automatically mean that those services are NET beneficial.

    Of course there is no modern self-made man – the primary vector of social interdependence is the division of labor, not government.

    Nor are we debating whether whatever you wish to call what we have in the west is clearly superior to the alternatives tried elsewhere. That is self-evident.
    At the same time we are and have been moving for some time away from the roots that produced that unbeleivable wealth, and towards schemes that have historically failed or faired far worse.

    All arguments for government without limits fail both practically and theoretically. You do not to adopt libertarian or austrian limits – but if you do not grasp that there are some limits, you are an aspiring totalitarian not a pragmatic capitolist.

    What you call group efforts are no more than the sum of individual efforts. No group can accomplish anything if the individuals sit on their hands. Nor are all members of a group equal. Bill Gates is not Microsoft, Steve Jobs is not Apple, yet clearly both are weaker without one man.
    Few of our future successes are going to rest solely on the shoulders of one individual. Nor will any be the result of egalitarian group efforts either. We are and will remain unequally productive, and our future standard of living will as it always has be more dependent on the few than the many.

  66. There’s actually not much in there I’d disagree with….I’m gonna go run in circles for a few hours. Try not to make the internet explode while I am gone. :-)

  67. So how did we get that way ?

    Not that long ago – about 5 centuries the global distribution of wealth was relatively uniform. While some nations were wealthier than others, humanity as a whole was abysmally poor. Divided everywhere between the 1% and the 99% who pretty much all lived in abject poverty.

    What values distinguish those nations and parts of the world that suddenly exploded relative to the rest ? Certainly not progressive or communitarian values. Why aren’t Buddhists or confuscians the most prosperous ? Until very recently Asia was well ahead of the west.

    The US today is substantially better than that of the past. But our rate of improvement has declined. That could be because that rate of improvement was unsustainable. It also could be because as government has grown our growth rate has declined with it.

    If you grasp that our standard of living is what we produce, then you should grasp that no matter what value government provides, it is on net less than the equivalent private use of the same capitol.

    Regardless or our addiction to government benefits we also all know that government is inefficient. Almost no one believes government wastes less than 51cents of each dollar.

    The fact that we all desire a free ride does not negate the fact that none of us want to pay for it, and that nearly all of us grasp that ultimately it is expensive. The real tragedy of the commons is government services. We tend to over consume them because we do nto have to pay for them directly, yet we know we are destroying ourselves and that they are inefficient and unsustainable.

  68. I just totally disagree with this:

    “our standard of living is what we produce”

    Our living standard is not what we produce. First, there is our financial living standard which is essentially the amount of labor hours it costs to purchases goods and services. This is similar to GDP though not precisely, but it’s close enough. But there is also our social living standard which is measured by the social well-being of the nation. Gross Domestic Happiness is one measure of this that I think gets fairly close.

    Living standards are much broader than simply producing more goods and services. And while capitalists are very good at producing more goods and services they are not always good at improving gross domestic happiness because that would imply that happiness = more production, which is not true in my opinion.

    Govt has a role to play in providing some balance between our GDP and GDH because, if it was left entirely to the capitalists, they would monopolize everything and crush their workers to smithereens under their unfettered power. That’s capitalism at its most extreme. The natural state of capitalism is to monopolize, to own everything and to profit maximize. In other words, the extreme case of capitalism is monopolized ownership in a winner takes all environment. The best capitalists will crush their workers like slaves to enrich themselves. That just is. And I think there’s a role for govt to stop this monopolization from occurring because it is not good for GDH. That doens’t make me anti-capitalist. It makes me Pragmatic Capitalist. :-)

    Look, I am not a big govt guy. I am an entrepreneur through and through. I am your “rugged individualist”, but I just don’t buy into the notion that govt is necessarily making us all worse off with everything they do. Could it be more efficient? Yes. Is it unnecessary or crushing the American living standard at present? I don’t think so….

    Okay, now I really gotta run. Literally. I’m getting fat sitting here debating shadows.

  69. Let’s use an *actual* reductio ad absurdum here:

    Let’s assume you are correct, and the average (median) American is in the top 1% of wage earners. It therefore follows (from the definition of median/average) that 1/2 of all Americans are in the top 1% of wage earners world-wide.

    However, 1/2 of all Americans is ~2.2% of all people on the planet. Therefore, 2.2% of all people are in the top 1% of all wage earners.

    This is a contradiction. *At most* the average American could be in the top 2.2% of wage earners, and that’s completely ignoring the rest of Western civilization.

    It’s highly unlikely that the actual median American is any higher than the top 5% of all wage earners, given the massive wage inequality that exists in this country.

    That’s still pretty damn good, and it’s a proud accomplishment for a nation. But exaggeration doesn’t help anyone.

    That web site doesn’t give any sources for its data. What it claims, on the face of it, is a logical impossibility.

  70. Okay, and what you’re doing is splitting hairs. Whether the average American is in the top 1% or the top 5% is really irrelevant. You understood the point I was making, but created a diversionary strawman of your own to barrel through after you realized I was right….

    Sigh.

  71. You stated that Austrian economists predicted hyperinflation. But Bob Murphy made a bet that a 10% year-on-year CPI rise would occur before Jan. 2013. He was wrong, but this doesn’t seem to count as a prediction of “hyperinflation” (generally defined as a 50% monthly inflation rate).

    http://consultingbyrpm.com/blog/2011/10/update-on-my-inflation-bets.html

    Peter Schiff is not a professional economist, so I don’t see why he should be seen as a spokesman for Austrian economics (and I believe Austrians should be consistent and not cite him as a scholar, either).

    Aside from these two, may I ask if you have any quotes from practicing Austrian economists (who have published in mainstream journals, such as George Selgin or Larry White) predicting hyperinflation or a collapse of the dollar in the immediate future? I haven’t been able to find any.

  72. Don’t take the victory lap until the recession is over.
    Most people are worse off than they were 10 years ago. Median income down, median net worth down. Labor participation down. Those are numbers that posters have brought into the discussions here.
    Households haven’t been propped up. Households are so off the radar screen we don’t even talk about them in economic life.
    We talk about pumping money into the system from the top down, money which somehow seems to flow right back to the top.
    We have a system in which it seems the 1 pct create wealth for themselves (for now) and the rest of us are supposed to be happy that food stamp payouts are up and that Merrill is still in business.
    You have the vision to see the problem — tell us how to fix it.
    End of rant!

  73. That’s nonsense. Bob Murphy has revised his own history. I saw his post where he claimed to have never predicted hyperinflation. Well, he did. It just takes a brief Google search:

    http://www.lewrockwell.com/2009/04/bob-murphy/hyperinflation-is-coming/

    Read the “analysis” in that article as well as this one which predicted “large scale inflation”. http://mises.org/daily/3933

    It’s terrible. It totally misunderstands banking. He talks about how the reserves will be lent out or get out of the banking system. It’s all wrong. It’s just a complete misrepresentation of how banks work.

    Here’s another Austrian economist who predicted hyperinflation:

    http://mises.org/daily/3390

    I realize that there aren’t that many famous “economists” in Austrian economics (primarily because there really isn’t a school that takes Austrian econ seriously so most “austrian economists” are really just armchair economists who never got any official econ training), but all of your most prominent spokes people were on the same page. Schiff, Tom Woods, Bob Murphy, Wenzel, Jim Rogers, Marc Faber, etc. There’s a reason why the entire economics profession shuns the idea of Austrian economics – it’s mostly junk and the only people who take it seriously are naive armchair economists who find it politically appealing, but haven’t actually done the homework to understand whether it actually makes any sense.

    Why do people perpetually defend these people who have been so incredibly wrong? I can explain exactly why they’ve been wrong and show you the exact operational realities why they were wrong and why they remain wrong. So why does anyone defend them???? I don’t understand it.

  74. Perhaps, just maybe “the recovery phase” is not over yet ?
    The collapse could still end in “systemic failure”.
    Being correct is only half the game for it is absolutely necessary to be correct at the proper time.
    Ask all those who were correct before Paulson put his money on the collapse, they went broke,early.

  75. Just had to comment quickly, because so much disinformation, ad hominem attacks, and outright biased false statements above.

    First, the “author” uses quite the false premise: The original definition of inflation is an increase in prices.
    His conclusion: The Austrians changed the definition to suit their own ends.

    Ha. Looks like the Author changed history to suit his own ends. The original definition of inflation was an increase in the supply of money. It meant that the supply of money was inflated, or blown up.

    That is the first definition according to the American College Dictionary in the 70’s and earlier periods.

    And honestly, who cares if a political ideology is connected to an economic one. They influence each other and in a day and age of increasing intervention in an economy, how can one argue that the two don’t go together?

    And my goodness, living standards rise as the money supply rises? Have you ever heard of mis-attributing causation with correlation? What “living standard” are you even using, as the rich get richer, the poor get poorer, and the middle class disappears?

    And then to think politics aren’t intertwined in economics..

    Those are just a few of the flaws I found by briefly (a few glances) looking at this article.

  76. More nonsense. No credible economist TODAY uses the old definition of inflation as a rise in the money supply. Besides, it doesn’t matter. Austrians used that definition to predict hyperinflation and high inflation which ended up dead wrong. So this is just a clever attempt at revisionist history.

    Who cares is an econ school is based on ideology instead of fact? Well, I care for one. I guess I don’t matter much, but we should all care because Austrians are professionals at spreading propaganda based on outright misunderstandings.

    I said living standards “could” rise with a rising money supply. That shouldn’t really be controversial at all as the money supply has exploded since 1900 as US living standards have also exploded. Unless, of course, you want to try to claim that we’re worse off now than we were back then. In which case the onus is on you to prove that.

    Is there a single Austrian commenting here or anywhere on the internet who understands banking and can actually defend their position with something other than rhetoric and vague “facts”??? This article has been posted on several sites and all I see from Austrians is the same misinformation I criticized them for in the original piece. It’s as if they didn’t read the article or just never took the time to learn banking over the last 5 years despite having made the worst predictions in the last half decade.

  77. Truth doesn’t depend on whether an economist uses it or not. Just because a society that once thought the world was flat thinks those “economists” are credible doesn’t make what they say true. Your “Great-Man” theory is worthless.

    Austrians never said hyperinflation was around the corner. They understand, as do I that money has to filter through the system. That credit, in our current system as opposed to Mises days’, is more important than just the amount of money printed and left for dead.

    Anything else you’d like to be set straight on?

  78. Sigh. Here’s Tom Woods in the first comment there:

    “Tom Woods
    I don’t think anyone denies this. If the money isn’t lent out, no money multiplier will be activated.”

    THE MAIN POINT OF THIS ARTICLE WAS TO HIGHLIGHT THAT AUSTRIAN ECONOMISTS USE AND USED A DEFUNCT MONEY MULTPLIER MODEL. IT IS WRONG. IT MISUNDERSTANDS BANKING. BANKS DON’T LEND RESERVES (except to one another). AUSTRIAN ECONOMICS IS BASED ON THE SAME LOANABLE FUNDS THEORY THAT RENDERS MUCH OF NEW KEYNESIAN AND MONETARIST THEORIES WRONG. YOUR LINKS ONLY PROVE YOU MORE WRONG!

    (Was that written large enough to perhaps start sinking in????) :-)

  79. Being “set straight” would involve not posting links to discussions about the money multiplier which prove you wrong.

    I don’t think you’re making an earnest effort to see where the flaw is here. The money multiplier is a myth. This is the flaw in your model. The loanable funds theory is junk. It doesn’t exist. Let me know if you’re actually interested in being open minded enough to learn why the theory is wrong. I am perfectly happy to help you better understand the concepts, but you have to want to understand them.

    I am flabbergasted at the number of Austrians who have come here, to Reddit and to Seeking Alpha explaining a money multiplier model to defend their position. It’s dead wrong. They’re proving my point without even realizing it. The sad thing is that some people actually buy into their “critiques” of my article. They miss the whole point!

  80. So first they predicted hyperinflation, then when they explain why hyperinflation is not here yet, you divert to the fact that they are using the wrong money multiplier. Let me tell you a little secret, prices of goods, oil, CPI, etc.. have over a 90% correlation to bank lending..

    “HE MAIN POINT OF THIS ARTICLE WAS TO HIGHLIGHT THAT AUSTRIAN ECONOMISTS USE AND USED A DEFUNCT MONEY MULTPLIER MODEL”

    First spell multiplier correct, then please define “defunct” as I think we went over that. Then, explain to me who cares how they believe money gets lent or not, it doesn’t change the FACT THAT LENDING CAUSES PRICES TO RISE. You think lending happens one way, they another. Big deal. They don’t only look to reserves to cause a rise in prices.. Stop misquoting people.

  81. 1. Plenty of Austrians predicted that the inflation would come and that it would come by 2010, 11, 12, 13. There are plenty of quotes from Murphy, Woods, Schiff, Faber, Rogers, etc. You’re just playing revisionist history. Now you’re all scrambling trying to hide the fact that you all made the absolute worst prediction in the last 5 years.

    2. Misunderstanding the way things work is not an excuse for faulty predictions. Not only did the Austrians get the prediction wrong, but they misunderstood why they were getting it wrong. At least they got the gold predictions right even if it was for the wrong reasons.

    3. Don’t worry about my spelling. This isn’t a grammar contest. And if it was I’d happily give you a gold star for your outstanding performance. Your economic performance, on the other hand, leaves much to be desired.

  82. Oh man. Looks like the Austrian trolls are starting to rain down. Good luck CR. Those guys are worse than M M Ters.

  83. I don’t think you understand how credit is created.. You seem to think that when financial assets are exchanged for goods or cash, because net worth changes it doesn’t affect us. That isn’t true because when more money is chasing fewer goods, it causes prices to rise. Simple supply and demand.

    I would like you to lay out step by step your “idea” of how inflation takes place. I don’t think you understand it.

    Of course, I don’t see any shiny examples of your wonderful predictions, all I see is Austrian bashing.

  84. Austrian troll? It’s called logic with common sense economics. I don’t call myself an “austrian”. Every group has flaws, though the Austrians have more going for them than other schools. One of the most important things is to keep government out of the economy. When you start with premises like that you can come up with much better solutions, no matter what you think the government should or should not do.

    It’s very simple, the free market works, therefore let the market alone… You don’t need a fed, and you don’t need QE.

  85. I always thought Cullen was at his best when confronting M M Ters but they are fellow PKers. Taking on the Austrians is much more fun!

  86. Austrian troll? It’s called logic with common sense economics. I don’t call myself an “austrian”. Every group has flaws, though the Austrians have more going for them than other schools. One of the most important things is to keep government out of the economy. When you start with premises like that you can come up with much better solutions, no matter what you think the government should or should not do.

    It’s very simple, the free market works, therefore let the market alone… You don’t need a fed, and you don’t need QE.

  87. You can’t be serious. You post a bunch of links to explanations about the money multiplier and then claim I don’t understand how banks create credit? Are you even reading this website?

    And I took the opposing side of the hyperinflation bets years ago. Here’s just one quote from 2010 with multiple (all correct) claims:

    UK is the next Greece (WRONG!). Oh no! Niall Ferguson says the US empire is over and we’re going bankrupt (WRONG!). Nouriel Roubini says the big bad bond vigilantes are coming for the USA next (WRONG!). Robert Shiller is correct (as usual) – we’re literally going to scare eachother into a second Great Depression. Meanwhile, the very crowded short t-bond trade is where the supposed “smart money” is lined up. Unfortunately, we have the playbook for this environment and it doesn’t involve hyperinflation, skyrocketing bond yields or sovereign bankruptcy (at least not in the case of the USA). Treasury bonds will continue to be the ultimate safe haven play despite the fact that every hedge fund manager in America thinks the USA is bankrupt (WRONG!):

    http://pragcap.com/three-things-i-think-i-think-12

  88. You are playing word games with yourself to say much the same thing as I am. You are also making presumptions about what I mean. Just as you are making presumptions about the ideology and economics that you are tirading about.

    Real wealth may be time, health, friends, family, it also may be food, shelter, .. It is anything that we need and want. Maslow’s hierarchy of needs would be a good place to start.
    I would suspect that if you are out in the cold you might think of shelter as a more important form of wealth than entertainment.

    My guess is that what you mean by financial wealth is just private money.

    “Real Wealth” as you call it, or just wealth may be more houses – but its value, depends on the extent we want and need them, and that is subjective.

    As to various examples of when wealth may or may not be created – that depends on our subjective sense of value.

  89. “You don’t need a fed”. And who will manage and regulate the payments system? Jamie Dimon, Stan O’Neal, Lloyd Blankfein? Are you kidding me? This is hopeless.

  90. So then you’re admitting that this comment:

    “We are only wealthier when something we want or need is produced that was not there before.”

    Was largely incorrect? I agree. That was my main point. :-)

  91. Well said. Keep hammering at the MR/Krugman/Summers/Keynesian idea that more money makes us wealthier and is an easy substitute for the complicated challenge of creating real goods and services.

  92. The “payments system” is a group of smaller payment systems that can all be managed individually. That’s like saying we need a governmental housing authority to manage all the housing communities. No, you don’t.

    And yes, lay out how you believe inflation is caused. If it’s so easy to point out why the Austrians are wrong about it, then it should be easier to explain the correct explanation.

  93. DP, I think we all agree that creating too much money will cause inflation. But do you really understand how money is created? Hint: it isn’t through QE.

  94. There really isn’t one Austrian school today, there are two wings: Auburn (Mises Institute) and GMU (freebanking.org, coordinationproblem.org). As far as I know, it’s only people in the former group who predicted hyperinflation. The Mises Institute has more lay popularity, but the academic output of the GMU group is greater and of higher quality. I only defend the word “Austrian” to keep it from being tarnished by the Mises Institute.

    I agree that the Rothbardian monetary econ of the Auburn wing is junk. But the GMU wing has done interesting monetary research on the history of successful free banking systems (e.g. Canada, Scotland) w/o central banks, among other things:

    http://www.freebanking.org/2013/07/13/what-we-have-done-for-you-lately/

    “the entire economics profession shuns the idea of Austrian economics”

    Most “armchair Austrians” are terrible. But that doesn’t mean there aren’t Austrian economists worth listening to. Would you say George Selgin (David Beckworth’s PhD advisor) is a terrible economist? And here’s what Brad DeLong said about Larry White:

    “Larry White is the best of the Austrians — the most persuasive, the most thoughtful, and the most knowledgeable of the economists working in the Austrian monetary theory tradition, which is an essential part of our collective diversified intellectual portfolio”

    http://www.cato-unbound.org/2008/12/08/j-bradford-delong/liquidity-default-risk

    So I agree that Rothbardian monetary econ needs to hit the trash. But it’s unfortunate the proud Austrian tradition (Mises, Hayek, Kirzner) has been dragged into the muck with Rothbard.

  95. That depends on what kind of money you are talking about, fiat or real money that was created from market forces?

    And there are many ways money is created. QE is one of them. The government buys assets from a bank. With what money? Digital currency. That digital currency is then on the balance sheet of the bank in which it can lend out approx. 10X of that amount. That money gets lent, goods are purchased and the amount of goods owned increases. Whether or not enough printed fiat money hits the hands of consumers or not, there is an increase in “money”.

  96. Yes, the bank receives “money” when it sells assets to the fed, but it lost those assets that it sold! It was a simple asset swap. The size of the bank balance sheet remains basically unchanged, as does its capital, which is the real constaint on lending. Not reserves. Banks don’t lend reserves (except to one another). There is no 10X multiplier effect.

  97. What assets do you think were swapped? I do see your point but what you don’t see is that they are getting paid on their reserves, and it’s coming out of our taxes! They also are able to borrow more from the Fed window as they took the “bad assets” off the balance sheet. It’s not a one-to-one swap completely, and it’s not a 10X multiplier effect either.

    However, you are still missing something. Debits and credits. Where did the “money” come from that allowed the fed the ability to buy those assets?

  98. The Fed created the money out of thin air to buy those assets. What’s your point? It doesn’t change the fact that those assets have been removed from the bank’s balance sheet. Bottom line is that bank balance sheets remain unchanged, nobody received any free money, and nobody’s spending power increased.

  99. The banks received free money by holding reserves and getting a higher rate on them than they had to pay to borrow from the fed! That’s free money if I ever saw it. And yes, the fed’s spending power increased. What happens when those assets mature? You think that money is just going to sit there? You think it’s really just sitting there, under the fed’s mattress? Banks deserved to fail,, they failed!

    And QE wasn’t only to buy assets from bank balance sheets. It also buys financial assets, in which banks are the largest holders of. Market rally anyone? It also allows the fed to lend to foreign nations, as it did, and those nations actually bought some American financial assets with them!

    Yup, still no free “money” for those that hold financial assets… HA

  100. DPinGA, take at look at this, it shows where the money comes from:

    http://brown-blog-5.blogspot.com/2013/08/banking-example-41-quantitative-easing.html

    The money the Fed buys assets with does not come out of taxes. The Fed credits the banks for it (case 1) and the bank may have in turn credited a non-bank for it (case 2). The two cases are similar. In a sense it’s all credit. All of our money can be created or destroyed. There’s a process in place for both and both happen on a daily basis.

    Every dollar is as asset to some entity and a liability to another.

    If you took all the financial balance sheets (excluding real goods, like houses, etc) of all the entities in the economy (Fed, Tsy, banks, non-banks) and consolidated them onto a single balance sheet with just a total dollar amount for assets and a single dollar amount for liabilities, those two numbers would be equal at all times… that one value might go up or down, but the assets would always balance the liabilities. Total equity (assets in excess of liabilities) remains zero at all times.

    Technically I just lied, because of the way the accounting is done for coins, but coins are still an “obligation” of the Tsy… so if we included that on the liabilities side, it would remain zero equity.

  101. The banks sold bonds yielding 3% in exchange for reserves earning 0.25%. That’s not free money you nitwit.

    Did you read Cullen’s primer on QE? He’s been correctly explaining all of this for years.

  102. Your sort of right. If I owned a stock, and it was bought on borrowed money, say 30 dollar stock and I borrowed 30 dollars but then the value of the stock went up my assets and liabilities are off. How does this affect us in the USA? Simple, foreign assets flow in causing the value of the assets to increase relative to the US liabilities. It’s kind of like a debt ponzi scheme.

    But the amount of goods and real assets in circulation matters. Because if I took that increased value and bought a real asset, the asset goes up in value. The seller of that asset has also increased his value. He is now able to buy more stock.. And it goes on and on and on.. The system is fueled by debt and valuation and bubbles. And when there is a reset, the liabilities decrease and the asset holders don’t suffer..

    What a system!

  103. That’s not what I said nitwit.. I never said they sold bonds, I said they borrowed money from the fed at a rate lower than they would get paid to hold it in reserve..Reading 101 Nitwit..

  104. I didn’t say that is what QE is. I said that’s part of it..

    The banks ARE able to borrow from the central bank window and get paid more on reserves than they paid to borrow them. That dichotomy was caused by the LOW RATES of QE..

    And for the record I was just returning the name nitwit to Mr. LVG after being called it myself..

  105. I’m not so sure you can describe an economy using that balance sheet arrangement.
    A bank, yes, but the economy, no.
    In such a model, the U.S. and North Korea are equal, because each has assets that are balanced by liabiilites.
    I don’t get that.
    For one thing, the U.S. has assets for which there are no liabilities. If I go out in the backyard and grow tomatoes, my vegetable garden is an asset. When my house is paid, it’s an asset. Where is the liability in either case?
    It seems vaguely like the ‘debt is money’ idea taken to an extreme.
    We unfortunately have an economy based on the idea that if I borrow money, I can go buy vegetables, instead of an economy based on, ‘hey, let me grow some vegetables and then trade them for something of value and we’ll use money to keep track.’
    So we’re sitting around figuring out how to create money and maybe call it a loan or a NFA just so we can get people to produce. Seems backward.
    Especially when the money we are creating is just being used to trade pieces of paper.

  106. You’ve been perfectly cordial so no worries.

    Fed discount window borrowing has been very low during the QE era so I don’t see how that is really relevant. QE is ENTIRELY separate from banks lending or banks borrowing from the Fed. It’s just an open market purchase of bonds. I think you’re confusing multiple things here.

  107. It’s not just the regular discount window but the emergency window that was open to banks.. In which a lot of money was borrowed. It is relevant, as the banks are making money off our taxes.

  108. Johnny & DPinGA,

    “But the amount of goods and real assets in circulation matters.”

    Absolutely! That’s what it’s all about.

    The money and financial assets are just a tool to get us there… that’s why there’s a BIG difference between North Korea and here.

    I think people sometimes have a wrong conception of what money is, which is why I pointed out that it all nets to zero at all times (the BSs that is).

    Mercantilism is that sort of wrong headed view. Read this:

    http://www.economist.com/blogs/freeexchange/2013/08/economic-history

    … and this:

    http://coppolacomment.blogspot.com/2013/09/savings-investments-and-dose-of-realism.html

  109. I’m not sure where the taxes come into play there… The Fed doesn’t take tax money to run it’s operations. Actually the Fed remits most of the money it makes to Tsy (helping to relieve us of part of our tax burden). Also, traditionally reserve levels were adjusted through repos, not discount window loans. Now they’re there through QE.

  110. The banks aren’t using that facility so again, there’s no “free money” being handed out via QE that wasn’t there before. If you want to say ZIRP is a free lunch then fine, but that’s not QE.

  111. Are you kidding me…. you think Jamie Dimon et.al. do NOT control the “payments system”?

    I’m not sure how things would work without the Fed, but as I understand it, the Fed was created to, in essence, eliminate the boom bust cycle – as you said in your paper, “to eliminate the sever financial crises…” (because the “poor” people – meaning the wealthy this time – were finally included in the pain during the Panic of 1907). IMHO, the FED has done an “absolutely stunning” job (I sure have been stunned!), since there haven’t been any busts – or financial crises – since the fed was created :-)

    The fact is all economic theories are unreliable because “ceteris paribus” is impossible in economics. The (economic) world is not some science lab where you can hold everything else constant and change one variable.

    If you could, perhaps the Austrians were right about inflation; that is, pumping money into the banking system should have pumped money into the economy (it didn’t cause the bankers sat on it – they were panicked too – shame on them for staying static like ceteris paribus “demanded”). And this, in theory, should have ignited inflation (so much for economic theories!), but that’s a lot of ifs because you can’t hold everything else stationary.

    At the most basic level, economics – real world, not textbook – has been a trial and error process over hundreds of thousands of years involving billions and billions of people throughout time. So I look at the world to see which countries have been economically the most successful. Without a doubt, those successes come from countries where governments have least interfered in the markets.

    This USE to be America and a handful of city-states like Singapore at one end and communist countries like China and the USSR at the other (and including 3rd world countries where a small elite control the economy… like America!). America changed, of course, when the Keynesians took charge in the Great Depression. These are LONG cycles and it finally looks like it is time to pay the piper.

    You said “Austrian economics is a political ideology that masquerades as an economic school of thought.” Damn right, sort of. Austrian economics is an economic theory that unmasks the charades going on in BOTH government and Keynesians economics.

    In case you MISS the point, charades is a GUESSING GAME. As an Austrian, I don’t care whether QE causes inflation (per se), and I’m not going to even argue the point. Rather, I just understand that a few elite in Washington making the decisions is a worse economic outcome that letting America’s 300 million decide with their pocket books and feet (or the world’s 6 billion).

    You said in your paper that “One of the key understandings here is that government can be used as a tool to help the private sector achieve prosperity… the government is primarily a facilitator in terms of private sector prosperity and that the private sector is the primary driver of economic growth and prosperity.”

    YOUR problem is you’re suppose to be “Pragmatic”. As far as our government is concerned, there is nothing further than the truth than what you said in the quote above, in the sense that the government no longer sits idly by “facilitating the private sector”.

    I am not anti-government per se. Rather, I am pro-“free market”. MY problem is that the further away the government has moved from your description, the more “anti-government” I’ve become. And as Keynesianism has grown, especially recently under Bush followed by Obama, I’m just about an anarchist now!

  112. It is all about “misrepresentation” or in that case “Mises representation” of Austrians if you want to play the who is the smartest game…

  113. You keep going back to straw men.

    The economic GROWTH in the 19th century is what many of us – not necescarily all Austrian want to return to, not the literally the exact same conditions. No one doubts that we are better off today than a century ago. But are we better off than we could be ?

    This fixation on gold is another. 19th century US was not some monetary utopia, nor was it a gold standard, nor was monetary policy free from politics. Yet for all its monetary problems, the Federal reserve system has performed as badly or worse.

    Pragmatism and discretion are all fine, possibly even commendable outside government. But they are an unequivocally bad idea in government. Build your business, invest, run your family as you please, but when you start making decisions backed up by force for others you do not get to make those by whim.
    We are “a government of laws, and not of men” John Adams

  114. “I am sorry, but you need to wake up to reality. Our govt is substantial and it’s not going away. We can quibble over the size of it, but the fact is, when it comes to cutting the size of govt almost NO ONE actually wants to cut the size of govt because we’re all indirect beneficiaries of various programs whether it’s the police force, the military, the social security payments, etc. Do you benefit from our govt at all? Do you use public roads? Do you ever call 911? Do you appreciate our military? Do you receive social security? Do you own government bonds that pay you interest? Do you want to cut all those things? Get real. Stop living in a fantasy.”

    That is known as the tragedy of the commons. Everybody wants something for free, but nobody wants to pay for it. Nothing to see here (you live in the fantasy here that socialism works over the long run; and you lived in another fantasy 2-3 years ago called MMT, so it seems that you are prone to it).

    “Pragmatic Capitalism is about understanding the great system we’ve designed. The system that has created ungodly wealth and a living standard that makes EVERY SINGLE AMERICAN IN THE TOP 1% OF GLOBAL WEALTH.”

    Many moving parts here:
    1) Your “American” system is now applied everywhere in the Western World. But why did the English that revolutionized capitalism, industrial production etc. drop from their dominant position they had prior to the American greatness, although they apply the same system basically? See – there are geopolitical factors and many others.
    2) How about that U.S. greatness was achieved, because you had a huge continent to settle in, while killing the indogeneuos people, plenty of natural resources, and then when time was right, you meddled in the 2 WWs (against your constitution) and came as a winner of the last one, so that you enjoy the permanent C/A deficits after that as a result of your reserve currency status? How about you enjoying your current status from your global military empire controlling the world to your liking while killing millions of people post World War II?
    3) Were all the achievements because of the current great system or in spite of it and due to factors in point 2) above? You have no proof of your statement.
    4) Additionally to 3), your current system is very different from the one in the 1800s, when higher real GDP growth was achieved than in the last 20-30 years. Back then you had a gold standard, flat CPI over 100 years, governemnt part of GDP at 2% (now 40%), no Fed etc. You are standing on the backs of the 1800s development much more than on the back of the last 30-40 years of interventionism / bank protectionism / govt creep / corporatism etc. Your system is also very different from the 1930s, 1950s and 1970s. It has been a creep.

    Some food for thought about the “great current system” and “American exceptionalism”, which sound like hollow platitudes to me, used laways in times when you have difficulties concentrating on some issues or finding arguments. And do not tell us that the current system is the best because it is evolution, because such evolution has also brought us Stalin, Hitler, Mao etc.

  115. You do not get it. Austrians apply the scientific method to economics and all the other schools apply pseudo science and shamanism (MR is different as it describes an institutional framework, although this all is sold with a lot of Keynesian interpretations and policy proposals). Why is that? Because economics is a social science and it cannot be treated like physics. So applying the garbage-in-garbage-out method is not scientific, its anti-scientific.

  116. If the point of your post is that Austrians get much of how the system works wrong – then your argument has failed.

    Austrian economics is NOT about gold.

    It is not about semantic arguments about inflation.

    It is rooted in a philosophical position – the same one that resulted in our political system, most of the success of the modern word, and even most religion.

    i can model the behavior of an automobile engine without regard to the laws of physics and possibly come up with something that works. But its adaptive, predictive and explanatory value is limited. That is essentially what I gather you are doing with MR. Or I can start with the laws of physics and end up with something much more useful.
    Virtually every school of economics proposes its fundamental principles, its equivalent to the laws of physics.

  117. The difference is that banks got directly bailed out (instead of going bankrupt) and bankers got record bonuses for failing (instead of getting their assets clawed back and go to jail). Main Street got some crumbles from what was left from the “trickle down” economics aimed at bankers and the other crony capitalists.

    If you do not see this, you are really blind.

  118. There is no doubt that the scientific method has great merit. Austrians do not reject it, they just reject its application to everything.

    The scientific methods is a means of testing hypothesis using carefully controlled laboratory experiments. I have not seen any economic school conduct controlled experiments.

    Conversely we have uncovered many of the principles that govern such things as mathematics absent the scientific method.

  119. You are really going to sell this “recovery” ?
    Employment as a percent of the workforce is DOWN since 2008.
    A smaller percent of us are working than any time since 1979 – that is recovery ?

    GDP has only recently exceeded its prior peak, it is nowhere near returning to the pre-recession trend. Economic growth is only barely positive.

    This type of stagnant recovery is exactly what we have seen historically in the US and throughout the world, when government intervenes in the ways it has.

    Of course there is fear mongering – there is plenty to fear. You do not need to be Austrian to grasp that even if we have bridged the financial crisis, we have not really addressed innumerable large problems we are facing.

  120. The corruption of political power is a political issue.

    As Lord Acton noted.
    “Power Corrupts”.

    The only solution is to limit government to that which only government can do, and nothing else, to tolerate abysmal efficiency in what remains, and to maintain eternal vigilence.

  121. Our GDP/PPP is nearly the highest in the world.

    PPP means purchasing power parity.

    To the extent our cost of living is higher it is because we want and can afford more. The actual cost of goods is lower than much of the world.

  122. “Is it even deniable that Austrians broadly claimed the US govt’s recovery policies would not work? That they would cause high inflation?”

    Yes.

    There have been many facets of the governments response to this crisis. I do not think any school of economics claims that if you do X always and everywhere in a complex system you will get Y.

    Even Keynes would be unlikely to endorse our fiscal responses. And the very best that can be said of them is that it MIGHT (not would) have been worse.

    Our monetary responses have been more complex.
    Given the actual world we have, not austrotopia, even Hayek argued for monetary easing. Anyone’s predictions of significant inflation presume real economic recovery, without the Fed reversing QE#.
    We do not have a real recovery, and without that inflation is less likely.

    As to how bad things are – growth is sub 2%. That is horrible, and without the rose colored glasses you would grasp that.

  123. 1). the housing bubble – even as you represent it is still a classic Austrian credit bubble. All that is left is the non-austrian argument that the excessive credit was a result of government policy.

    2). If “we the people” voted to execute everyone over 60, would that not still be murder ?

    3). Your entire argument – both in the main post and this response, conflates arguments mad by some people who might be associated with Austrian economics, with the principles of Austrian economics.
    No school of economics, is immune to guilt by association attacks.

  124. The banks were protected from failure. The rest of us were not. Failure is an essential part of the self regulation of the market.

    The fear of the future moral hazard we have created is not limited or unique to Austrians.

    The Trillions spent to “save the financial system” will take many decades to recoup.
    If we have a similar crisis tomorow, next year, 10 years from now, where do the resources for the same response come from ?

  125. What is money?
    “Money is the NOTHING you get for SOMETHING in order to exchange for ANYTHING”, Frederick Soddy

    Understanding why Austrian Economics is Flawed?
    Really, shouldn’t that question be , “Understanding why all Economic theorys are flawed ?
    No one got it 100%.
    Could it be like price prediction ? Past results can not guarantee future results.

  126. Which part of “want or need” is unclear ?
    Just to be clear, it must be wanted or needed by people, not governments. And the measure of how much it is wanted or needed is the price we are willing to pay for it.

    When government acts outside its legitimate scope, it is by definition attempting to supplant the choices and values we make as individuals with collective ones. That MAY result in a net increase in wealth (or a net loss), but it will result in a loss in comparision to what we would have done otherwise.

  127. You are trying to create false distinctions.
    What you call “financial standard of living” to the extent that it exists at all is just a sub-component of our standard of living.

    We individually decide what we value. We prioritize those values. We do not do so the same, nor do we do so the same under all circumstances.
    My concerns about my finances are inconsequential when my life is threatened.
    Yet, food, shelter, security, as well as financial well being, entertainment, free time, love, health are all “wealth”.

    And now you are really going off the deep end.
    Please identify a sustained monopoly that has ever existed without government support ?
    Of course businesses seek monopoly – but without government help they fail to achieve it.
    If the power of employers is so great why is it that only a small percent of us earn minimum wage ? Why dont we have the same power as consumers ? Why can I abuse my auto mechanic, or grocer ?

    Why is Happiness a single measure of human attainment ?
    If killing others make me happy can we maximize that ?

    Our happiness, is a significant component of GDP. We produce things because we want and need them.

  128. Could the flaw be ….PREDICTING ?
    Who is 100% correct ?
    Why fault the entirety of one for surely “by chance and timing”
    they got something right (a broken clock is the only perfectly accurate clock twice a day- no other clock can beat the speed of light to record the exact time), does that mean we should only use broken clocks ?

  129. Of the 3 articles you cite only the last comes close to actual predicting hyperinflation. And even there mostly in the title.

    The two Murphy articles offer inflation as a possibility, maybe even a probabilty, but not as a certainty.

    Most predictions of inflation are preconditioned on an actual recovery starting – which has not occured.

    Austrians (and most other economists), beleive that substantial sustained increases in money supply ALL other things being equal, will ultimately result in price inflation.
    But all other things are not equal.

  130. You keep mis-rephrasing the argument.

    Every form of economics uses principles to model reality.
    The validity of the principles is evaluated atleast partly by conformance to facts. There is no such thing as an economic model that is devoid of some principles.

    Friedman continued to assert inflation as a monetary phenomena throughout his life. He is not Austrian, and another Nobel winner.

    googling inflation will produce articles in the past year by non-austrians asserting inflation as a monetary phenomena.

    The stagflation of the 70’s was reigned in by MONETARY means in the 80’s, wage and price controls in the 70’s made it worse.

    While you MIGHT be correct that some economists view inflation through a non-monetary perspective, that is not the universal view, monetary inflation is not a solely austrian view, nor is it an old or obsolete view.

    There is no direct relationship between standard of living and money supply. That is a logical absurdity and fails reductio ad absurdem easily.

    Standard of living improved faster in the 19th century – despite sustained deflation.

    You keep harping back to a failure of austrians to “understand banking”.
    But none of your arguments beyond the vague claim that austrians do not “understand banking” have anything consequential to do with banking, nor have you explained why austrians do not understand it.

  131. So Austrians are now wrong for the same reason that some 2/3 of all economists today are also wrong ?

  132. Stop backpedaling. You look ridiculous. One explicitly calls for hyperinflation. Murphy calls for “large scale inflation” which is just a clever rewording from the hyperbolic title. They were all wrong. More importantly, they were based on a totally incorrect understanding of banking which is the main point. Austrians misunderstand how the monetary system works. So, even if their predictions had been right they would have been right for the wrong reasons. End of story. You guys just don’t understand how things actually work. And it can be proven by pointing out the predictions about reserves from QE. Your entire model is based on a credit expansion that you don’t understand. The entire Austrian Business Cycly Theory is based on the loanable funds theory which is garbage economics. It renders your school largely wrong. This would be plain as day to you if you understood banking, but you don’t.

    You’ve been sold up the river by a bunch of arm chair economists masquerading on financial TV as real “economists”. The thing is, you’re worshipping false idols. You think all these Austrian econ guys are so much smarter than everyone when they clearly don’t understand basic banking or the monetary system. And they run around calling everyone else stupid every day and screaming over everyone as they try to pass off politics as economics. It’s just a bunch of nonsense and you’re too narrow minded to try to see their errors.

  133. 1). Plenty of Austrians (and others) did predict inflation, most of those predictions presumed recovery. Most of us Austrians or not grasped that the Fed will face significant problems backing out of QE. The entire economy is jittery even about hints of scaling it back. Economists as a whole are notoriously bad at prediction.

    2). You claim facts trump ideology and then rant because Austrians got the facts right on gold for the wrong ideological reasons.

  134. This was inevitable. The gold call. I also pointed out over the years that gold has a high correlation to negative real interest rates. This has been written about in econ papers for decades. It’s nothing new and you didn’t have to be an Austrian economist or understand any of their misleading nonsense to see why gold would rally in a negative real int rate environment. You just had to understand Gibson’s Paradox and a 35 year old paper.

    The bottom line is that ABCT is based on the loanable fund theory. You all believe people have to save before they can spend and that banks lend out their reserves. This is one of the most central and important components of the entire economic school. It’s wrong. Demonstrably wrong. And it renders the ABCT flawed. If you don’t get that then you don’t get it. Which is fine. I am not here to twist your arm about what you want to understand. But don’t be shocked when your false idols continue to make absurd hyperbolic predictions about things based on the world they don’t come close to understanding.

  135. The US ran relatively badly for over a century in the hands of politicians. Since 1913 it has been run at the very best no worse by a central bank.
    That is not a glowing endorsement of central banks.

    Presuming that what exists is what must exist is fallacy.
    In 1970 it would have been easy to say “How could one possibly call someone without AT&T?”. Today few of us own traditional phones.

  136. Now you are just being obtuse. There is no disagreement between my quote and my expansion of it.

    You claim to know the difference between wealth and money, and the Austrians fail to understand banking, but you are thoroughly confused about something as simple as wealth.

    You seem to think that dividing wealth up into different catagories creates an important distinction.

    You grasp that wealth can be intangible, periodically reject that it can also be tangible, and then want to pretend that it can be objective.

    Please explain how intangible forms of wealth such as love, happiness, free time, …. can be objectively quantified and then centrally optimized ?

  137. My point is that wealth is different things to different people. To you “wealth” is having lots of toys and real goods. You think you’re rich if you have lots of real production. Which is what most people believe, which is why they spend their lives working for the man chasing some dream that capitalist America convinced them to believe. So they live their lives collecting lots of plastic crap and McMansions and cars thinking that will make them “happy”.

    I think wealth can be lots of things. But I think the most important forms of wealth are things like love, happiness, independence, friends, family, etc. To me, those things matter a lot more than a McMansion and more plastic crap off the production line. Now, I also understand how increased production makes us all better off by giving us more time to consume more goods and services in the future so I am not saying production doesn’t matter. But I wouldn’t build my definition of “wealth” around it as you have. But we perceive wealth as different things so that’s fine.

    The bottom line is, wealth is not something that can be objectively quantified because each man/woman will value it differently. Money and financial wealth is just one way we try to obtain true wealth. But confusing money and financial wealth for true wealth is like confusing a theater ticket for the show.

  138. If government can be used as a tool to help the private sector achieve prosperity, then government can also be a tool to decide who within the private sector succeeds and who fails. A government that has the power to pick winners and losers will be corrupted by those who want picked. People do not become better when they enter public service.

  139. This is fun… you bring up M M T or Austrians you’re SURE to get lots of spirited comments. The MM sites get the same… go to Sumner’s site and look for “Cantillion Effects” you’ll find about a half dozen posts (all close in time) each with about 200 comments! One of his posts is called “There Really, Really, Really, Really aren’t any Cantillion Effects” … way to throw gas on the fire!

    … LOTS of push back there from the Austrians.

  140. We did not have a gold standard in the 1800’s, we had a variety of schemes with Central Banks, treasury control of money, bi-metalic standards.

    These all proved flawed – though not appreciably more so than our current federal reserve system.

    The Austrian Business Cycle that is being criticized here has its origins in analysis of the fiscal and monetary failures of the 19th century. It is often argued that all economic downturns have monetary roots. That MIGHT not be an absolute truth – but certainly the overwhelming majority are.

  141. I follow alot of economists from a variety of schools. I do not invest any of them with infallibility. That said those evolved from classical liberalism, including Austrians make the most sense, and seem to have the best handle on things.

    I am defending Austrians here, primarily because your critiques are weak, and wrong. Come up with something good and I will listen. Though if you can not get wealth and money right, you can not possibly get banking right.

    Further I came to my “ideological” economic views – pragmatically. Theories that have no application to the real world are useless. Most schools of economic thought do not work in the real world. No economic school has proven good at prediction – though Austrians have fared better than most. But the minarchist approach that is embedded in Austrian economics has consistently provided better outcomes when followed than any other approach, and there are logical reasons that explain that outcome both in economics, philosophy, and human behavior.

  142. I do follow Murphy – but I also follow people like Mankiw, and Tayor.
    I do not get information from TV talking heads about anything. Not economics, not politics.
    I actually read books and papers – and not mostly Austrian.
    And most run at odds with many of your claims.
    I do not pretend to be intimate with Austrian Economic theory. But I do know enough to know that your blog post attacking it was shallow and either wrong or irrelevant.

    Murphy has already admitted he was wrong about inflation.
    Though you are still conflating predictions of inflation with substantial inflation possible, with absolute predictions of hyper inflation. Schiff or others may have made such claims – I do not know I do not follow him – or Krugman for similar reasons.

  143. You keep saying that I am wrong, but you aren’t even refuting my main point about bank reserves and lending and how this central misunderstanding in ABCT is wrong. So I don’t see how you can claim I am “wrong” when you are not even touching on my main point….

  144. I follow all those dudes also. I try to keep a very open mind. I’ve rejected a lot of the work from most of those guys. I was actually arguing with Krugman just last week about something similar with his use of the IS/LM model. He makes the same basic mistake Austrians make.

    So I don’t really agree with any particular school of econ thought either. I’ve formed Monetary Realism in large part because I see things pretty differently from most mainstream economists. It’s about as independent thinking as economics gets. You might want to explore it a bit more before rejecting my positions so vehemently. I think you’d find a lot in there that you like….

  145. I am not sure why you are fixated on gold. Few of the counters here are. i really do not care whether Austrians got gold right, or wrong or right for the wrong reasons.
    While many including an increasing number of mainstream economists are starting to question the current central bank regime, i am not aware of an actual economist of any repute that thinks that gold is some magical substance and the only basis for money. At best it is a means of imposing discipline on central banks run amuk.

    You keep ranting about ABCT and loanable funds theory.
    Your critique seems to amount to “they are wrong because I say so” and they are core to Austrian economics because I say so, and therefore Austrian economics is wrong.
    You can read alot of Hayek or Mises without encountering either. And as best as I can tell your attacks on them would contradict economists atleast as far back as Say, and probably most modern non-keynesians. Possible some Keynesians.

    I think both assertions are false. Regardless, I say so is not an argument.

  146. Look, I am not just “saying so”. This is how banks actually operate. And loanable funds is central to Austrian thought. If you want to claim I am wrong about banks then fine. No skin off my back if you keep using a flawed model of the way the world works. I am not here to twist your arm into believing that I am right.

  147. Can you please quit telling me what i think – particularly when it contradicts what I have said ?

    I think if we relabel what you call financial wealth as private money,
    we mostly agree on wealth except that you do not seem to grasp the consequences of the subjective nature of wealth, nor grasp that forms such as
    “love, happiness, independence, friends, family” are higher values that we rarely pursue until we have met our needs for food, shelter, etc.
    This is psychology as much if not more than economics, and not particularly austrian.

    This concept of wealth – one you mostly agree with has consequences.

    The first which follows from the hierachy of needs that you ignore, is that until we meet more fundimental needs we rarely attempt to meet less tangible ones.
    A man who is starving, is rarely fixated on entertainment.
    Much of what is perceived as the flaws of past capitolism, is merely society reaching sufficient affluence to start caring about child labor, worker safety, …
    Government did not save us from the problems of capitalism. It just intervened to solve a problem that would have been solved anyway – because our standard of living was now sufficient to care about it.

    Finally, you have grasped the subjective nature of value – wasn’t that Mises primary contribution to economics, and last i checked he was an Austrian.

    Regardless, that subjectivity has natural consequences. If value is subjective, you can not manage it top down.

  148. This is pointless. You asked me not to “tell you what [you] think” and then go into a long rant telling me what I think. Thanks for stopping by. I just don’t think there’s much point in continuing this. Have a good one.

  149. ‘We are only wealthier when something we want or need is produced that was not there before.”
    — That’s not a bad definition. ‘Wants and needs’ could be dollar bills, houses, health care, peace of mind, happiness, whatever the individual desires (with the societal caveat that one man’s happiness should not diminish his fellow man.) Many of those wants and needs can be satisfied by dollar bills, others by education or religion or civic participation, etc., etc.
    The huge blocks of apartment building in China would probably reinforce dhlii’s point that government does a poor job allocating resources.
    I would say that government and economics now are fixated on trying to produce wealth with monetary and fiscal tools instead of the other tools at hand.
    I think that’s what this debate is out.

  150. Yes, I keep saying you re wrong – without much explanation – exactly as you keep saying ABCT and Loanable Funds Theory are wrong – with no explanation.

  151. No, I explained how banks don’t lend reserves and provided facts. You just ignored them. Anyhow, seriously, this is pointless. Take care.

  152. Saying “that is just how banks operate” is just a permutation of I say so. I am not claiming that you are right or wrong about banks. You have not said anything about them for me to agree or disagree with.

    To the extent i understand Loanable funds theory – which is not something i have come accross alot in my reading Austrian or otherwise, it is the application of Says law to credit. Are you really arguing that Say’s law is wrong ? If so you are taking out alot more than Austrians. Further though I am not expert on the financial market as a whole, it is not my understanding that banks are the primary source of capitol today, so in the event that your Banks do not operate that way argument actually works, it still insufficient.

  153. I can not find a single reference on the wikipedia entry for ABCT, either in the explanation or in the criticisms to bank reserves.

    Based on a shallow understanding of banking, I do not think Banks loan reserves, but do not grasp how that is relevant to ABCT.

    I also do not understand why you think ABCT is inseparable from Austrian economics as a whole.

    Keynesians as an example have no meaningful explanation for economic cycles.

    Beyond that I think that economics in general has implicitly accepted that booms are a bad thing. I am not aware of any other economic theory that actual states that.

  154. Tom Brown, “Every dollar is as asset to some entity and a liability to another. ”
    Does that state Soddy, (paraphrase) ‘Every NOTHING is a SOMETHING to exchange into ANYTHING’ ?

  155. ALSO:”I think people sometimes have a wrong conception of what money is, which is why
    I pointed out that it all nets to zero at all times (the BSs that is).,Tom Brown
    When banks lends $100 billion @4% compound interest for 18 years while abiding by a 6% capital requirement.Please tell me how the net result to the bank is zero when the loan is paid in full what actually happens is the banks have $6 billion in their accounts but they created a future income of $200 billion. They subtract the “fictitious” money (the loan amount) because they created that out of thin air, but they get to keep and spend ‘real money’ in the amount of $100 billion. There is something really un-equal about they way banks can make money. If the loans were on houses, the builders and sellers of the $100 billion of houses probably had to put up $50 billion a lot of sweat and work to produce a gain of $50 billion. The banks do not even put up the $6, they only have to show they have it.
    True or false: IF 1,000 banks were to loan $1 billion at 4% over a period of 180 years, they would only need to know what date they would posses all the assets of the entire world and still have a balance. This zero sum game means: Private for profit banks 100%, 99% of the world 0 !

  156. Quote Evers,”government does a poor job allocating resources.”
    Perhaps so, but why not call the attention to “private for profit banks’ that we allow to ‘print’ our money, charge taxes (they call it interest) on that printing and then allocating those extremely high returns to the 1%.

  157. justaluckyfool,

    Don’t read too much into my statement. It has more to do with what money is in our system: I think people think of money (incorrectly) as a pile of gold, which it’s not: like there’s an inflexible set amount of it in the world.

    Regarding your example, all I can suggest to you is don’t forget that a bank’s equity belongs to people… shareholders, bondholders, etc. That equity will be distributed back into the system. It’s false to assume the banks equity will just continue to accumulate w/o every leaving the bank again. Why would anybody be interested in owning a bank if that were the case? The fact is that banks buy stuff with their capital by crediting bank deposits: electricity, office supplies, loans (i.e. make new loans or buy existing ones), employee time, etc. It’s what simple parables like this one on youtube never mention:

    https://www.youtube.com/watch?v=3HdmA3vPbSU

    They do not describe the full flow of funds in that “tale.” They should be honest and describe that part too. They wouldn’t have to change much about the video and it would make it more accurate. Now is this system fair? Isn’t it just the shareholders that end up w/ all the wealth? I won’t get into that! That’s where your opinion comes in… I just want people to be aware of the shortcomings of the kind of analysis presented in that video. People should get all the facts to base their opinion on. This is super simple, but it might help too:

    http://brown-blog-5.blogspot.com/2013/08/banking-example-10-principal-interest.html

    If you believe banks will end up owning the world, maybe you should invest in bank stock. :D

  158. Interest is the time and risk preference price of money.
    It is not a tax. You are not obligated to borrow, but if you do you are obligated to pay interest.

    you are obligated to pay taxes

  159. dhlii,

    Are you familiar with George Selgin’s research on the 19th century US banking system? Essentially, most of the troubles came from:

    1) restrictions on branch banking (resulting in overexposure to local econ conditions and overdependence on NY, Chi, and St. Louis correspondent banks for access to major money markets);

    2) bond collateral requirements for new banknote issuance (e.g. to issue $100 of notes, a bank first had to buy $110 worth of state govt bonds). This arbitrarily tied note issuance to the state bond market (and overconcentrated bank assets in this category, which often turned to junk–the source of failures for most of the “wildcat” banks).

    3) the Civil War National Bank Acts, which eliminated private note issuance by state-licensed banks via a 10% tax on such issues.

    You may find the link below of some interest. I don’t agree with most of the Austrian monetary theorists (e.g. Rothbard, Salerno), but Selgin and Larry White have produced what I feel is outstanding work.

    “The Case for Free Banking: Then and Now”
    http://object.cato.org/sites/cato.org/files/pubs/pdf/pa060.pdf

    This talk is also excellent on the 19th century problems (in comparison with Canada, which largely avoided such currency panics):
    http://www.youtube.com/watch?v=kkpgJ1g-I-8

  160. Actually, Cullen, I believe about half of all payments in the United States are currently processed by the Clearing House Payments Company, which is privately owned.

    http://en.wikipedia.org/wiki/Clearing_House_Interbank_Payments_System

    “The Clearing House Interbank Payments System (CHIPS) is the main privately held clearing house for large-value transactions in the United States, settling well over US$1 trillion a day in around 250,000 interbank payments.”

    Historically, in the US private clearinghouses such as the Suffolk Bank in MA processed payments. The successful MA system would have undoubtedly been copied by other states had the Civil War not broken out and the National Bank Acts (designed to generate wartime revenue) had not been passed.

    http://www.adamsmith.org/sites/default/files/images/uploads/publications/suffolkbank.pdf

    In Canada, until 1935, all payments were privately processed. So yes, a private clearing system has existed historically and continues to function in the US.

  161. Right, good point. Still, in the absence of Fedwire, what would prevent private banks from coming up with a comparable system? Surely it’s technically feasible.

    Btw, please don’t think of me as a hard-headed Austrian who isn’t willing to learn anything. I’m very interested in learning more about a Post-Keynesian flow of funds framework for examining the economy. I know you have links, but I learn best from books. What do you think of Lavoie and Godley’s “Monetary Economics”? Any other book recommendations?

  162. Hi John,

    I think the key is that the Fed still dominates interbank payment no matter how private companies clear if they’re substantial. If they are large enough to move markets and influence the economy then I think they will eventually fall under the jurisdiction of Fed regulations.

    I think Monetary Economics is the best one. It’s very dense. Have you read my paper on the monetary system? That is usually a pretty good starting point. If you read everything on this page you’ll pretty much know where I am coming from on all of this:

    http://pragcap.com/mr-recommended-reading

    Let me know if you have questions. Have a good one!

  163. The problem is that banks’ creating money out of nothing is a fraud. It is bad enough that this is allowed to exist. What is even worse is that the fraudsters are then constantly massaged by the Fed and bailed out by the govt when they fuck up. The system should at least have the courtesy to let the fraudsters go bankrupt when they overindulge in their exorbitant privilege. (And no, letting Citibank and Co go bankrupt in 2008 would not have wiped out the depositors, just the equity holders, management and imposed a haircut on the sacred bondholders)

  164. Mr Roche,

    Austrians have a major issue with fractional reserve banking.

    If the central bank of any country clearly declared its intentions to move towards a fully maturity matched banking model. i.e. checking accounts would not be lent out, 3 month loans would have to be matched with a 3 month deposit, 10 year loan would have to be matched with a ten year deposit, etc.

    This need not be sudden. The central bank could declare the current figure for maturity mismatch in the system (no. of $ * days of maturity mismatch) and target to reduce this with time. They could commit to do enough QE to not allow the economy to collapse.

    So, if the banking industry moves to such a model, then would the austrians’ logic be more valid, being a world that their model is supposed to reflect.

  165. So anything private to replace a government system that does not exist in the form you deem necessary at this moment is impossible or can not be done without government ?

  166. You are correct – in any market that the federal government or its minions enter, it will dominate, monopolize and otherwise regulate in order to control for governments benefit. Nothing new here.

    But the relevant question and your claim was that these things can not be handle as well if not better privately.

    The fact that government or its agents have taken them over, and prevent real alternatives does not make it self evident that it must be that way.

  167. @prakash
    Quote Justaluckyfool (Google or Bing),”What if the Federal Reserve Bank were to mandate: all loans must be 100% capitalized? All loans must be backed 100% by the ‘good faith and credit ‘ of the Monetary Sovereignty.” Since this would perhaps cause “systemic failure” since there is not enought real money in existance to cover, included in the mandate would be that banks would be allowed to borrow the amount needed to be solvent at 2% compound interest for 36 years.
    OMG, if $72 trillion was needed that would produce ‘a revenue income of $4 trillion per year.
    OMG,eliminate federal income taxes, eliminate FICA, reduce student loans to 0.25% !
    Prepare the people for prosperity.”

  168. @TomBrown RE: “They do not describe the full flow of funds in that “tale.” They should be honest and describe that part too. ”
    First, thank you for referring those sites to visit. As to ‘full flow of funds” and the effects of compound interest, would you glance at …”Governments can create new credit electronically on their own computer keyboards as easily as commercial banks can. And unlike banks, their spending is expected to serve a broad social purpose, to be determined democratically. When commercial banks gain policy control over governments and central banks, they tend to support their own remunerative policy of creating asset-inflationary credit – leaving the clean-up costs to be solved by a post-bubble austerity. This makes the debt overhead even harder to pay – indeed, impossible. … It is too early to forecast whether banks or governments will emerge victorious from today’s crisis. As economies polarize between debtors and creditors, planning is shifting out of public hands into those of bankers. The easiest way for them to keep this power is to block a true central bank or strong public sector from interfering with their monopoly of credit creation. The counter is for central banks and governments to act as they were intended to, by providing a public option for credit creation. ****Read more..by Prof. Michael Hudson ; http://www.globalresearch.ca/index.php?context=va&aid=28938 FOUR:The most powerful force in the universe is being used against mankind,rather than for the benefit of mankind. “…. The Mathematics of Compound Interest .
    Questions 1. Does this mean you agree that a bank can create a loan for $100 and get $200 back in 18 years if @4% interest while using NO real money of its own albeit it must have $6 in real money in its bank ?
    If so then we only need to resolve the question of ..How the private for profit banks “redistribute” their net interest income.

  169. YES, and a rose is a rose, no matter what you may call it.
    Do you not believe that ‘Private For Profit Banks’ charge people “roses” to use currency they print and do not own because it is not ‘real money’ rather it is temporary money that must be zero- ed out when paid back; they get to keep the Net Interest Income which is real money they acquire by charging ‘roses’.

  170. dhlii says:
    09/12/2013 at 12:35 PM
    “If government can be used as a tool to help the private sector achieve prosperity, then government can also be a tool to…..”
    WOW, great statement, and that’s no ‘if’ for government can and should be used to help the “people to prosperity, equality and pursuit of happiness. The unbelievable part is that it is possible with a simple action: Make the Federal Reserve Bank work ‘for the people’, stop working ‘for the private for profit banks’, at which they are doing an excellent job.

  171. justaluckyfool,

    $202.58 actually.

    Yes and what you’re forgetting is that even here when you sign a loan agreement, both you and the bank are taking a risk. There’s the obvious risk of default on your part that the bank takes on, but there’s a further risk associated with changing interest rates and the inflation rate.

    As a simple example of assume Bank A makes a loan to Person X for $100 to buy a house at 4% for 18 years, compounded annually and all due (interest and principal) in one balloon payment of $202.58 at the end of the period. The house seller (Person y) is a crazy paranoid who wants the $100 in cash so she can buy weapons and food for her cave in the wilderness, so the bank borrows $100 in cash reserves from the Fed to hand to her.

    Now say inflation runs at 6% over 17 of the 18 years in this period, and that the bank didn’t forecast that correctly! Also assume the Federal funds rate on that borrowed $100 in cash is raised to 5% for these same 17 years. Guess what x’s house is worth now? And how much is that balloon payment worth now 18 years later in real terms? Now who came out ahead?

    (What’s worse is that person y happens to own the bank, so she’s doubly out of luck!)

    I’m not arguing that this is a perfect system we have or that the financial sector has perhaps grown too large (I think you could make good arguments to that effect), but I’m saying we need to look at the full picture.

  172. Wow, RMM would say ,”That is some real misdirection.”
    That the bank receives $202 in real money in exchange for $100 ‘bank “fictitious” (Frederick Soddy) simply because it has $6 on it capital sheet is what needs to be address.
    If you wish to talk about risk/reward on bank loans,haven’t you discovered yet that normal loan risk by banks to people is less than 2%. Bank risks when they are in trillions of dollars are much higher BUT not to the banks because the larger the amount the less rick because the Fed will HAVE TO make it good or else what ? “systemic failure”?.

  173. Prakash,

    Please note that not all Austrians oppose fractional reserve banking. The GMU/Free Banking Austrians have pointed out that full reserve banking has never outcompeted fractional reserve banking in the marketplace.

    http://www.freebanking.org/2011/05/31/the-state-and-100-percent-reserve-banking/

    http://www.freebanking.org/2012/07/02/testimony-on-fractional-reserve-banking/

    Free market banks can, and have historically, come up with ways to cope with the danger of bank runs.

    1. Option clauses
    http://monetaryfreedom-billwoolsey.blogspot.kr/2013/03/free-banking-and-bank-runs.html

    2. Private lender of last resort (clearinghouse associations)
    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=758

    Had free banking been allowed to develop (i.e. if the US had followed the Canadian free banking system after the Panic of 1907, a possibility which was investigated), other ways to protect banks from runs would surely have evolved. JP Koning here speculates on private liquidity options:

    http://jpkoning.blogspot.kr/2012/05/free-banking-alternative-to-centralized.html

    I don’t believe Austrians should oppose fractional reserve banking. It is a contractual agreement btw individuals, which the govt should not have the right to forbid. Opposition to central banking, on the other hand, is something all Austrians should in principle be against.

  174. CR,

    Serious question I am hoping to get some insight on:

    What is your working knowledge of Austrian economic theory based upon?

    Do you just read some Austrian “headlines”, or are you serving up someone like Peter Schiff as an example without naming him, or have you read some or all of the major Austrian theoretical works during your intensive study period in 2008?

    The claims you advance in this article would be easier to understand if I had a better idea of what you’ve read of “Austrian economics”.

  175. This blog is the perfect example of why economics and economic theory is essentially the by product of society reaching a point in which people have too much time on their hands. Do you think native Americans sat around trying to explain the intracies of how their system if trade worked? Do you know why? Cause nobody gave a shit, they were to busy working to survive. By work I mean producing something of real value to contribute to their society so that they too could benefit from what others in society contributed. Pretty simple. Without wasting time with the history of money lets just keep it simple. Money in its intended state was nothing more than a way to measure a mans work and ingenuity. If it takes twice as much effort to produce a pound of squash than a pound of potatoes or if people found squash more desirable than the squash would cost twice as much. Now today the financial system is a touch more complicated but one thing does remain the same, today’s financial system is still made up of the same simple component…humans. I’m pretty sure humans are animals and like all animals they need incentive. At the root of everything that incentive is survival. If I take a wolf pup and raise it from birth hand feeding it everyday do you think that wolf is ever going to have incentive to chase an elk all over a mountain. Hell no, that would be work and work by its very nature kinda sucks and if you are given the elk meat there is absolutely no point in running all over the place getting tired, risking injury trying to produce elk meat for yourself and your pack. Even a f**kin dog has that reasoning capacity. The two main differences in economic theory as I see it come down to one simple question. Is money/ wealth something that is created by the people of the society through the incentive to create better goods and services for that particular society and in turn a better life for ones self ? Or is money just something the government creates and uses to control society in an attempt to mantain power. Currently it seems like the popular belief is the latter. The bottom line is this. If we had a healthy economy there would be no need for our government to intervene in any way in the process of how our government is financed and the fact that it is doing so is insane. I don’t think it really matters whether it increased bank reserves, money supply or any of that crap . The bottom line is that it is artificial demand for the primary product our government uses to finance itself so when that demand is removed there is no way in hell that the result will be good. Perhaps if that artificial demand was being used to actually produce incentive among its citizens the result may not be all that bad but it’s not. It’s being used to prop up a society with a growing percentage of fat lazy wolves who think they have the right to lay in the sun while the rest of the pack hunts their food for them. How this party ends is anyone’s guess but I think a little insight may come from looking at places like Detroit and Chicago. In closing let me leave you with what I consider to be the single best quote with regard to economics. No order of society can last in which one man says to another, “you work and toil, and earn bread, and I will eat it”. Abraham Lincoln.

  176. Oh and CR if we are far from broke please explain to me why we are 20 trill in debt and now adding 1 trill roughly per year. You may want to tell the people of Detroit not to worry cause their city is not really broke. There is not a doubt in my mind that you are an incredibly bright person so please explain to me how a government that at current levels needs to borrow almost half of its yearly budget with the largest generation in history about to retire is not in serious trouble. Lets not even talk about the fact that the percentage young people in the labor market is as low as its ever been. By your logic if a corporation had the ability to just create revenue out of thin air and use that revenue to buy it’s bonds so that their interest payments stayed low and their value high enough to prevent selling you would say there is no problem there and those bonds should remain triple a. Why didn’t Greece just do this if it was that simple?

  177. “This blog is the perfect example of why economics and economic theory is essentially the by product of society reaching a point in which people have too much time on their hands.”

    The beautiful irony is that you just wrote one of the longest, rambling posts in this comment section.