Review – Restrepo

I watched a NatGeo documentary last night called “Restrepo.” It’s about the conditions and objectives of a small US Army platoon in the mountainous wilderness of Afghanistan.

Very little happens in this movie over its 1.5hr runtime. There is a lot of buildup and talk about how often the base is attacked, and this is depicted several times, but overall nothing happens. I don’t know if this was an intentional part of the plot (“the futility of the Restrepo mission”) or if it’s bad editing or belies a fraud about the claims being made in the film about what it is like for these troops, but it is not entertaining. And by that I don’t mean, “Gee, I wish there were more poor, dumb soldiers getting wasted in this real life documentary” but rather, “Gee, what am I getting out of watching this film?”

That being said, this is not good propaganda for the US government’s desire to nation-build overseas. Why does the military allow journalists and documentarians to embed with their troops? Restrepo is an offshoot of a slightly larger but still insignificant base tasked with enlarging the “security bubble” in the area so that a road can be safely built connecting two hapless economic regions into one, which is supposed to bring jobs, incomes and peace and happiness to the land. Every bit of tactical maneuver in war seems really stupid when studied by itself — “50 men gave their lives for a bridge that was ultimately destroyed by the enemy anyway, why did 50 men die for a bridge?” — but the Restrepo mission seems especially stupid not because these men are fighting and dying and accidentally murdering local civilians for an unbuilt road, but because the premise behind building the road is itself very stupid. Do the local Afghans even WANT this road? If they did, why didn’t they build it before the US Army showed up?

Is military Keynesianism a viable structure for developing foreign economies? Keynesianism doesn’t seem to work to develop domestic economies. And the military, professional murderers and demolishers, don’t seem to be the right people to task with building things, let alone people’s economies. Wouldn’t it make more sense to send overwhelming military force through the area, wipe out/expel the organized Taliban elements and then let civilian diplomats and construction contractors come through and negotiate new power structures and infrastructure plans?

The Korengal Valley itself, where the drama unfolds, is truly magnificent geography. It reminds me of the valleys I hiked on the Inca Trail in Peru on my way up to Macchu Picchu. In fact, the remoteness, the terraced cultivation and the “primitive” lifestyle and social organization of the Afghans looked nearly identical to what I saw in Peru. It seems like a perfectly nice place for the locals to live and you get the insane idea watching the movie that they never asked for the US Army to invade their territory and murder their wives and children in helicopter gunship assaults, and they’re not all that thankful for their service now that they’ve shown up. Would it be unpatriotic, dare I say even treasonous, to suggest that the Afghans are getting a raw deal here and it’s hard to wonder why they wouldn’t want to overtly or covertly support the Taliban in these circumstances?

That old quip about “I’m from the government, and I’m here to help you” runs hard through the film’s narrative. We see again and again the way the local commander makes big promises and doesn’t follow through– he murders a guy’s cow and offers no agreeable compensation, he disappears a local who he suspects of being an accomplice of the Taliban and then offers the vague assurance that he’s being treated nicely and will soon return though he doesn’t, and he responds to an attack by calling in a fire mission on a neighboring village that kills and maims several women and small children. I don’t care who someone is fighting for, if I had to hold the charred body of my innocent two year old in my arms and watch a bunch of crude monkeys rifle through the smoking remains of my home looking for contraband after such an incident, I think I’d lose my shit.

And what IS the best solution to murdering someone’s cow, anyway? If you could get your higher-ups to release the $400-500 cash to pay the guy back (I think the village elders took the US Army for a ride on that request, by the way, there is no way a cow is worth half a grand in the mountains of Afghanistan) doesn’t that incentivize them to let more of their cattle wander into your concertina wire whenever they lack liquidity? And if you can’t get that cash released, aren’t you guaranteed to keep pissing off the locals while insisting you’re there to win hearts and minds?

The long and the short of it is that imperialism is a terrible idea in the first place, but the United States government isn’t even good at imperialism. It is very half-hearted and half-assed in its attempts to brutalize and control foreign peoples and spends more time apologizing and groveling about its numerous mistakes than making any meaningful progress in terms of rapine and pillage. It makes you wonder the whole time how such a pointless and ineffectual system can sustain itself, until you realize that the people who are really getting mulcted in this process are the guileless American people “back home.”

And the poor, dumb US foot soldier is the tool used to tug at those people’s heart strings while picking their pockets clean. “Thank you for your service,” indeed.

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Review – The Panic Of 1819

The Panic of 1819: Reactions and Policies

by Murray Rothbard, published 1962, 2007

Please note, this book is also available as a free PDF on the Mises.org website, which is how I read it [PDF]

Introduction

Rothbard’s “The Panic of 1819” is a lot of things, but the thing it is most is yet another reminder of the old dictum “Plus ca change, plus c’est la meme chose”. Contained in this approximately 250-page reporting of the causes, consequences and social responses to the Panic of 1819 are the same behaviors and political programs that could be found in today’s headlines about corrupt Chinese banking practices, Chicago-school monetarism and Keynesian pump priming, including early recognition that attempts to kickstart “idle resources” logically implies a totalitarian command economy where the government manages all resources (and all people) at all times.

It’s all here, and more. There is nothing new under the sun.

How the business cycle gets started

Early on page 16 the reader is entreated to an excerpt from private correspondence between Pennsylvania politician Condy Raguet and European economist Richard Cantillon in which Raguet tries to clear Cantillon’s confusion as to how fractional reserve banking manages to operate to the point of a catastrophic bubble instead of wobbling and crashing under its own confusing weight:

You state in your letter that you find it difficult to comprehend, why person who had a right to demand coin from the Banks in payment of their notes, so long forebore to exercise it. This no doubt appears paradoxical to one who resides in a country where an act of parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our population are either stockholders of banks or in debt to them. It is not the interest of the first to press the banks and the rest are afraid. This is the whole secret. An independent man, who was neither a stockholder or debtor, who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society.

Today’s full reserve Austrian economists, caught between clueless and complacent bank executives, a massively indebted “ownership society” public, Keynesian and monetarist adherents and “free banking” friends who are anything but, simply has no place to turn for safety. He defaults to “enemy of society” status in the ensuing confusion though he seeks only to point out the folly of these fractional reserve systems which inevitably injure all in tying their fates by one string.

The Panic of 1819 followed the War of 1812. During the war, imports and exports came to a halt due to the sea being a battleground and many products which would’ve been imported were kept in their home (overseas) markets to furnish the war effort. As a result, the young States United of America saw the development and growth of domestic manufactures and exportable industries. However, when the war ended and international trade resumed, many domestic manufacturers found they weren’t actually competitive facing world markets (this makes sense because if they had been they probably would’ve developed before the war, not during it in a period of “isolationism”). This created a nascent strain of “protectionist” thinking and monied interests who saw a benefit to adding tariffs on imported products.

The end of the war and the resumption of trade saw a banking boom (fractional reserve) which finally ended in 1819 with the panic. From about 1819-1823 the country was in and out of what could be termed depressed economic conditions. In many ways the early country’s experience mirrored the present day experience from 2008-2009 onward, especially the contentious economic and political debates about how to respond.

Something I found fascinating was what happened to various “macro” economic metrics during the Panic (what we’d call a crash):

The credit contraction also caused public land sales to drop sharply, falling from $13.6 million in 1818 to $1.7 million in 1820, and to $1.3 million in 1821. Added to a quickened general desire for a cash position, it also led to high interest rates and common complaint about the scarcity of loanable funds.

That last bit is especially fascinating to me. I don’t know what the state of federal funded debt was in this time period as Rothbard doesn’t really go into the concept or existence of a “risk free rate” but it is interesting to see “deflation” leading to HIGHER rather than LOWER interest rates. In today’s topsy turvy world, low rates are supposed to be the result of the flight to safety during a depression while high rates are supposed to herald an economic recovery. However, it seems it was just the opposite in 1819.

I found myself charmed by the ability of so many in 1819 to see what was the cause of the bubble and the collapse, even politicians. For example, in an address supporting a “relief bill”, Illinois Senator Ninian Edwards observed:

The debtors, like the rest of the country, had been infatuated by the short-lived, “artificial and fictitious prosperity.” They thought that the prosperity would be permanent. Lured by the cheap money of the banks, people were tempted to engage in a “multitude of the wildest projects and most visionary speculations,” as in the case of the Mississippi and South Sea bubbles of previous centuries.

I enjoyed learning that even medical analogies to describe the cause and effect of monetary expansion and collapse were popular in 1819. One government committee, the Hopkinson Committee, arguing against “debt relief” legislation, noted:

palliatives which may suspend the pain for a season, but do not remove the disease, are not restoratives of health; it is worse than useless to lessen the present pressure by means which will finally plunge us deeper into distress.

I thought that pain pill and hangover analogies were something recent and peculiar to adherents of the Austrian school but critics knew of these rhetorical flourishes even two hundred years ago, at least!

On the topic of “flight to safety”, I did make note of one paragraph which seemed to suggest that while interest rates on bank debt and other commercial lending may have risen, interest rates fell dramatically on tax-backed (ie, “guaranteed”) government issues, for example:

“A Pennsylvanian” pointed to United States and City of Philadelphia 6 percent bonds being currently at 3 percent about par– indicating a great deal of idle capital waiting for return of public confidence before being applied to the relief of commerce and manufacturing. Thus, in the process of criticizing debtors’ relief legislation, the “Pennsylvanian” was led beyond a general reference to the importance “confidence” to an unusually extensive analysis of the problems of investment, idle capital, and the rate of interest.

This theme of “idle capital” was remarked on more than once in the text and by various parties with differing viewpoints. This is a particular fetish of Keynesians and monetarists who cite the existence of “idle capital” as an excuse for government to raise public spending to “put it to work.” It is fascinating to see these early Americans predicted Keynesianism by almost 150 years!

Another thing I found remarkable was the prevalence of either state-owned banks (federal, with the Bank of the United States, or individual states) or strong political pushes to establish these banks in response to the ensuing depression and the stress this created on the banking system. In other words, nationalization of the banking industry as a political prop to collapsing FRB institutions is nothing new:

The Alabama experience highlights the two basic measures for monetary expansion advocated or effected in the states: (1) measures to bolster the acceptance of private bank notes, where the banks had suspended specie payment and where the notes were tending to depreciate; and (2) creation of state-owned banks to issue inconvertible paper notes on a large scale. Of course, the very fact of permitting non-specie paying banks to continue in operation, was a tremendous aid to the banks.

People refer to the United States economy and monetary system at various points in time being “free market”, and while it’s true that tax rates and business regulations were generally less cumbersome near the nation’s founding than today, it is also true that there has been a virulent strain(s) of interventionist thinking and policy-making from very early on. It wasn’t until 1971 with Richard Nixon’s closing of the gold window that the US currency finally went fully inconvertible, and yet already in 1820 (if not earlier), people were calling for inconvertible paper currencies issued by state-owned banks. Some free market!

The whole episode seems to beg a question that, sadly, Rothbard did not explicitly address or explore, namely, Why did banks need to be chartered by the government in the first place? Although there were calls during the response to the economic crisis for various forms of occupational licensing and business regulation (aimed at stemming the flood of superior imports damaging local industries), the reality is that any other business but banking, such as butchering, baking, sawmilling, leather tanning, import/export, etc., did not require special permission granted by a session of the local legislature, state or federal. Why was banking different, requiring an act of congress to get the enterprise going?

Besides the fact that many such banks seemed to be public-private partnerships which included state “capital” injected into them, the only answer I have managed to come up with so far that makes any sense is that the banks were all set up on a fractional reserve basis, and a blessing by the government served to either 1.) grant legitimacy to an illegitimate institution or 2.) create the pretense and wishful thinking of providing some kind of “legal oversight” to what everyone at the outset understood to be an essentially criminal organization operating with a special legal privilege or 3.) both.

Because every bank had to be chartered, when the FRB system inevitably hit a bump in the road as it did in 1819 and many banks wished to suspend redeemability of their bank notes to stem outflows of specie, their status as creatures of the public legal mechanism meant they could run to the legislature for permission to violate their own contracts– and they almost always got the permission granted. Now, for example, if angry pitchfork-wielding townsfolk show up to break into the vault, take their gold and lynch the bankers, the Sheriff might step in with his posse to make sure everyone remembered their role.

Keynesians and monetarists and Chinese bankers

Continuing the theme of “everything new is old”, I was struck by commentary from a Pennsylvanian congressman named Henry Jarrett suggesting that government relief money might serve to prime the pump of the economy:

An inconsiderable sum of money, for which the most ample security could be given, being loaned to a single individual in a neighborhood, by passing in quick succession, would pay perhaps a hundred debts.

Kind of sounds like George W. Bush urging Americans to go shopping after 9/11, in order to get confidence in the economy back. It’s a crass Keynesian tactic inspired by a confused understanding of the relationship between production, consumption and the role of money in the economy.

It was also interesting to see how many people back then could sense there was a problem with the way the banking system operated, but were confused into thinking banking in and of itself was illegitimate, rather than simply the practice of issuing a greater supply of banknotes than the amount of specie held in reserve. Consider a campaign circular for a candidate for Congress from mid-Tennessee, who said:

banking in all its forms, in every disguise is a rank fraud upon the laboring and industrious part of society; it is in truth a scheme, whereby in a silent and secret manner, to make idleness productive and filch from industry, the hard produce of its earnings

If you substitute “banking in all its forms” with “fractional reserve banking”, you’ve got a pretty accurate description of the nature of the problem.

It’s also worth quoting at length the argument of “An Anti-Bullionist”, who thought that the economic crisis of 1819 was caused by specie money specifically, rather than abuse of specie money via fractional reserves. In its place he sought to create a fully inconvertible paper currency issued by the government which would of course be “well regulated” and serve to protect the economy from the inevitable deflationary death spiral of the specie system he believed he was witnessing. Shades of later monetarist thinking abound:

His goal was stability in the value of money; he pointed out that specie currency was subject to fluctuation, just as was paper. Moreover, fluctuations in the value of specie could not be regulated; they were dependent on export, real wages, product of mines, and world demand. An inconvertible paper, however, could be efficiently regulated by the government to maintain its uniformity. “Anti-Bullionist” proceeded to argue that the value of money should be constant and provide a stable standard for contracts. It is questionable, however, how much he wished to avoid excessive issue, since he also specifically called a depreciating currency a stimulus to industry, while identifying an appreciating currency with scarcity of money and stagnation of industry. One of the particularly desired effects of an increased money supply was to lower the rate of interest, estimated by the writer as currently 10 percent. A lowering would greatly increase wealth and prosperity. If his plan were not adopted, the writer could only see a future of ever-greater contractions by the banking system and ever-deeper distress.

Even chartalists will be happy to see that early proponents of the “American System” of nationalist public-private industry were representing their views in the debates of the early 1820s, for example:

Law pointed to the great amount of internal improvements that could be effected with the new money. He decried the slow process of accumulating money for investment out of profits. After all, the benefit was derived simply from the money, so what difference would the origin of the money make? And it would be easy for the government to provide the money, because the government “gives internal exchangeable value to anything it prefers.”

Why even have a private industry? Or money, for that matter?

Luckily, advocates of laissez-faire existed in this time period, too, and they were not silent. Commenting on one proposal to deal with “idle capital” by Matthew Carey, the “Friends of Natural Rights” wrote:

The people of the United States being in a very unenlightened condition, very indolent and much disposed to waste their labor and their capital… the welfare of the community requires that all goods, wares, merchandise and estates… should be granted to the government in fee simple, forever… and should be placed under the management of the Board of Trustees, to be styled the Patrons of Industry. The said Board should thereupon guarantee to the people of the United States that thenceforth neither the capital nor labor of this nation should remain for a moment idle.

[…]

It is a vulgar notion that the property which a citizen possesses, actually belongs to him; for he is a mere tenant, laborer or agent of the government, to whom all the property in the nation legitimately belongs. The government may therefore manage this property according to its own fancy, and shift capitalists and laborers from one employment to another.

Finally, I don’t seem to have made a good note of the specific passage that caught my attention in this regard but I chuckled when reading the description of the operations of the average bank before collapse. These bankers would set up a new bank and pay only a fraction of capital with specie, the rest would be constituted by additional promissory notes from other banking institutions (which were themselves fractional). The bankers would pay themselves dividends, in specie, while the bank operated, and issue themselves and their friends enormous loans with which they’d purchase real goods and services, all while the real specie capital of their bank depleted. When crisis hit and they could not redeem their depositors’ money, they’d get legal permission to suspend redemption, ask for infusions of new capital from state authorities and/or set up a brand new bank whose purpose was to steady the previous institution. Ultimately, the bank would collapse and this too would work in their interest because they’d already hauled off the specie via dividends to themselves, and many of them were debtors of the bank who now had loans due in a worthless currency that was easy to obtain.

It reminded me a lot of the present Chinese state capitalist model.

Conclusion

“The Panic of 1819” is not light reading and for some readers it may not even be interesting reading. It depends a lot on how fascinating you find in depth examinations of “minor” historical economic events.

But that doesn’t mean it isn’t surprising, well-written (for all the facts and data, Rothbard still manages to weave together a narrative that helps the reader appreciate the nuances of the various factions and viewpoints of the time) and at times, depressingly relevant. People who care about economic and financial history and unique, formative episodes in the early history of this country, will find a lot of insights and curiosities in this work. I strongly recommend it.

Notes – The Snowball, By Alice Schroeder: Part I, Chap. 1-4

The following are reading notes for The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder. This post covers Part I: The Bubble, Chap. 1-4

Why Warren Buffett is driven to make money

The first chapter of The Snowball opens with the author interviewing Buffett in his office at Kiewit Plaza. She asks,

Where did it come from, Warren? Caring so much about making money?

Interestingly, Buffett’s response is something of a non-sequitur:

Balzac said that behind every great fortune lies a crime. That’s not true at Berkshire.

Are we supposed to believe this means Buffett is ultimately a moralizer? That he’s driven to make money just to show it can be done in an honest fashion? If so, where does THAT come from? You see, Buffett didn’t answer the question posed to him.

We also learn that Buffett reads voraciously, and that he watches CNBC (on mute, just to get the scroll of news stories and market developments). Every good investor knows CNBC is a bunch of noise, it is not edifying and it is distracting. It’s peculiar that a long-term oriented, value investor like Buffett would make CNBC part of his daily routine.

Buffett travels to Sun Valley, Idaho, July 1999

We begin to see Buffett as a completely self-absorbed individual. As he travels with a contingent of his family (children and grandchildren) to the Allen & Co. “elephant-bumping” retreat in Sun Valley, the man never looks out the window of his G4 and

He sat reading, hidden behind his newspapers, as if he were alone in his study at home

where, apparently, he treats his significant other, Astrid Meeks, in similar fashion, as noted in a later chapter which depicts Astrid as something of a live-in hamburger-making, Coke-delivering otherwise-invisible person who tries not to disturb the Great Warren during his nightly routine of hours of online bridge and conversations with his insurance lieutenant, Ajit Jain, at 10PM at night. Everyone’s entitled to their flaws and interpersonal relationships seem to be one of Buffett’s.

Which is interesting, because he goes to great pains in Sun Valley to be liked by everyone. Buffett

liked few things more than getting a free golf shirt from a friend [Allen & Co.’s president and organizer of the outing]

and he

went out of his way not to be disliked by anyone

Somewhat peculiar juxtaposed social relationships for a man who waxes philosophical about the Inner Scorecard versus Outer Scorecard in life, one being a measure of self as seen by self, the other being a measure of self as seen by others. You’d think neglecting your family while making pains to impress social acquaintances would register on the Inner Scorecard, but no matter.

This isn’t a Beat Up Buffett blog– the man has a lot to teach and I have a lot to learn. I just find these items odd as I read.

The festivities in Idaho are noteworthy because of what an extremely above-average experience it is for the people involved when compared to daily existence for the Average American, let alone the Average Human Being. To wit, after “white water river rafting” down a stream lined with ambulances and quick response teams for safety (and, one might imagine, helicopter gunships for security),

the guests were handed warm towels as soon as they put down their paddles and stepped out of the rafts, then served plates of barbecue

In addition,

Reporters were banned [from covering the outing]… [the various money managers in attendance represented] more than a trillion dollars [in combined wealth under management]

This is unusual company, an elite group within society, wittingly or not. There is nothing wrong with this level of affluence, it’s simply worth mentioning to set Buffett’s life into context– he’s not of us, at least not at this point in his career.

The key scene at Sun Valley is Buffett’s economic-prediction-as-financial-market-lesson-speech in which he lectures the newly minted tech bubble millionaire crowd on economic cycles and sound investing. A few notes:

  • Most people treat stocks like chips in a casino; Buffett sees the chips represent ownership in businesses (entities that create more chips over time)
  • Technology is not a guaranteed win for investors; history is replete with new technologies that made huge improvements in everyone’s standard of living, yet few had made investors rich (ie, the automobile, and the 3,000 original manufacturers that had over time combined into 3 major firms in the US; airline industry, $0 made in the aggregate stock investments in the industry’s lifetime)
  • Valuing is not the same as predicting
  • What you’re doing when you invest is deferring consumption and laying money out now to get more money back at a later time. And there are really only two questions. One is how much you’re going to get back, and the other is when.
  • As interest rates vary, the value of all financial assets change
  • Three ways the stock market can grow faster than the economy:
    • interest rates fall and remain below historic levels
    • share of the economy going to investors as opposed to employees, government, etc., remains above historic levels
    • the economy grows faster than normal
  • Book value: the amount of money that had been put into the business and left there
  • Ultimately, the value of the stock market can only reflect the output of the economy; on average, the return of the stock market is about 6% a year

Buffett also makes reference to “Lord Keynes”; not that it’s a big secret, but I don’t know anyone who isn’t a Keynesian who refers to Keynes that way (with prestige and respect for the State-granted honorific). If it wasn’t obvious otherwise, I’d say this is evidence enough of Buffett being a Keynesian.

Buffett also lives by the rule, “Praise by name, criticize by category.” That’s very Dale Carnegie-esque.

Enter the Munger

In Part I, we’re also introduced to Buffett’s curmudgeonly friend and business partner, Charlie Munger.

Munger is a graduate of Harvard Law School. He also

admired [Benjamin] Franklin for espousing Protestant bourgeois values while living as he damn well pleased

We also learn a curious fact about Munger’s charitable practice, which

took the form of a Darwinian quest to boost the brightest

but often took the form of “noblesse oblige” because he attached many strings to his giving which were “for the recipients own good, because he knew best” (Schroeder’s articulation). Munger and Buffett are famous for their hands-off, passive management approach to their acquired businesses; yet when it comes to charity, Munger is a world-saver who tries to micro-manage things to an almost tyrannical degree. It seems like a mismatch, but, when combined with his love of Franklin’s philosophical pragmatism and his background at Harvard, it fits the egotistical elitist mold quite well.

Munger, like Buffett, reads a great deal, tearing through newspapers and periodicals everywhere he goes. And Munger, like Buffett, seems quite impressed with his father– Munger carries his father’s old briefcase and vacations at his father’s old Minnesota cabin, while Buffett has a shrine-like portrait of his father in his office and claims he’s “never seen anybody quite like him.”

Revisiting the theme of “Why does Buffett watch CNBC?”, Buffett is subscribed to several newsletters about stocks and bonds and he reads the daily, weekly and monthly operating reports of the Berkshire subsidiary companies. For someone with a long-term orientation, it seems puzzling he would be fascinated or concerned with this kind of contemporaneous minutiae, but perhaps his is simply a mind that thrives on volumes of data to create patterns, impressions and meaning.

Finally, when we learn about Buffett’s two scorecards, we also learn that Buffett pays “close attention” to the rankings of the world’s wealthiest people. This standing would appear to reside on the Outer Scorecard which Buffett warns against measuring one’s life against.

Notes – “Economics: The User’s Guide”

Economics: The User’s Guide

by Ha-Joon Chang, published 2014

Who is Ha-Joon Chang?

Born in South Korea in 1963, Ha-Joon Chang is currently a professor of economics at the UK’s University of Cambridge. He gained his PhD after successfully completing a thesis on “industrial policy” under British Marxist Robert Rowthorn, which advocated a “middle way” between central planning and free markets.

In a section on his personal website entitled “Economists Who Have Influenced Me“, Ha-Joon Chang states,

Many people find it difficult to place me in the intellectual universe of economics. This is not surprising, given that I have been influenced by many different economists, from Karl Marx on the left to Friedrich von Hayek on the right.

Of Austrian economist FA Hayek, Chang further states,

Hayek is very different from the Neoclassical school, even though many Neoclassical economists mention him in the same breath as Milton Friedman, on the basis that he was one of the most influential advocates of the free market. Unlike Neoclassical economists, however, Hayek does not take the socio-political order underlying the market relationship as given and emphasizes the ultimately political nature of our economic life. This is a big contrast to the Neoclassical view, which thinks that economics and politics can be, and should be, separated. Indeed, if you read Hayek’s book, Individualism and Economic Order, you will see that he is very critical –sometimes even abusive – of Neoclassical economics.

And with regard to Marx, Ha-Joon Chang claims,

With the collapse of communism, people have come to dismiss Marx as an irrelevance, but this is wrong. I don’t have much time for Marx’s utopian vision of socialism nor his labour theory of value, but his understanding of capitalism was superior in many ways to those of the self-appointed advocates of capitalism. For example, when free-market economists were mostly against limited liability companies, Marx saw it as an institution that will take capitalism on to another plane (to take it eventually to socialism, in his mistaken view). In my view, 150 years after he wrote it, his analysis of the evolution of labour regulation in Britain in Capital vol. 1 still remains one of the best on the subject. Marx also understood the centrality of the interaction between technologies (or what he called the forces of production) and institutions (or what he called the relations of production), which other economic schools have only recently started to grapple with.

On the dreaded Keynes, Chang admits,

Despite having been educated and taught in Cambridge, I have not been very ‘Keynesian’ in my approach to economics. This is not because I disagree with Keynesian thinking, but because I have mainly done my research on ‘micro’ issues, such as trade and industrial policy. However, I have come to be drawn more into ‘macro’ issues in the process of thinking about the recent financial crises, especially the 1997 Asian crisis and the 2008 world crisis. In thinking about these issues, John Maynard Keynes, Hyman Minsky, and Charles Kindleberger have been big influences.

According to biographical information in his book “Bad Samaritans”, Chang grew up in relative poverty as the son of a South Korean finance minister. He has written a number of books on the subject of economics, specifically with regard to economic history, global economic development and global trade patterns. Henceforth in my book blogs I will refer to him as “HJC” to save myself time.

Because of HJC’s intellectual background, pre-eminent social and intellectual position and large and established bibliography of thought, his ideas are worth studying and critiquing as a representative of a popular strand of “economic” thinking supported across countries and institutions.

Introduction

My purpose in this book blog is to apply my own understanding of economics (informed, to date, by a mainstream US college education in the subject as well as intense and ongoing self-study in a variety of alternative theories) to the methods and arguments provided by HJC in this introductory economic work of his and in so doing arrive at conclusions about the soundness of his thought. In particular, because HJC represents a strain of “new thinking within the mainstream” and my personal convictions lie with what is known as the “Austrian school”, I want to empathetically highlight the areas where the two schools are in agreement, as well as try to explain wherein the differences lie.

Let’s get started!

“Why Are People Not Very Interested In Economics?”

HJC wonders why economics is an unpopular subject:

95 per cent of economics is common sense – made to look difficult, with the use of jargons and mathematics.

This is actually a point the Austrians make– that good economics involves simple logical deductions within the grasp of any reasonably intelligent person and that the introduction of jargon and higher math is used to keep laypeople out and make the discipline unintelligible to the uninitiated. HJC says that economics doesn’t appear to be relevant to most people’s lives and that the issues that they believe economics deal with, such as international currency movements, government budgets and foreign aid debates, are not things people believe they can comment on or think about competently without economic training.

On the other hand, HJC laments the “megalomania” of many economists who would just as soon argue that economics is the most relevant intellectual discipline in that it seems to explain everything, and more. HJC critically cites the success of titles like “Freakonomics” and the humblebrag quality of many economic book titles that purport to show how economics is behind anything that can be imagined.

HJC sees a more limited role for economics in human thought, though still an important and useful one, which raises two specific issues: is economics a science and, to the extent it is, what is economics actually about?

Is economics a science?

HJC is pretty clear on the matter:

economics can never be a science in the sense that physics or chemistry is [because] human beings have their own free will, unlike chemical molecules or physical objects.

He also adds that,

people have been led to believe that, like physics or chemistry, economics is a ‘science’, in which there is only one correct answer to everything

Instead, HJC argues that

What is needed is to learn economics in such a way that one becomes aware of different types of economic arguments and develops the critical faculty to judge which argument makes most sense in a given economic circumstance and in light of which moral values and political goals (note that I am not saying ‘which argument is correct’).

Let’s consider these claims one by one.

The first claim, that economics can never be an (empirical) science like physics or chemistry is something that Austrians would again agree with. The Austrian view of the epistemology of economic science strictly prohibits the use of inductive logic derived from empirical observation and research. The reason for this is that in “hard” sciences like physics, the effect is known but the cause is unknown. Physics, as an example, is a study of effects in search of causes. Various factors deemed to be the significant causal agent dictating a particular result can be tried in a series of controlled experiments and then conclusions can be arrived at by the experimenter based on the manipulation of the variable factor and the observed changes in the experimental data.

Economics, by contrast, is a science whose causes are known (human action) but whose effects are often mysterious, because multiple causal factors can occur simultaneously in the lead up to an observed result. For example, the price of two pounds of chuck roast at the supermarket involves a negotiation between a group of suppliers of chuck roast and a group of buyers of chuck roast and these suppliers and buyers are unique and uniquely motivated at a given time and location. The method of the economic sciences, then, must be the “gedanken experiment” (thought experiment) in which a conceptual reality is held in mind and the logical implications of changes in one factor at a time are deductively explored. This is impossible when studying human action, that is, economic activity, because it is never that one thing only changes and it is never guaranteed that the same reaction will occur by the people observed because of the nature of free will.

It is in fact curious that HJC makes this specific point because later on he seems to contradict himself when he says,

we need to look at history because we have the moral duty to avoid ‘live experiments’ with people as much as possible.

The questionable moral claim of having a duty to avoid human experimentation in economic matters “as much as possible” aside, this quote suggests that HJC believes economic theory can be derived from historical (experimental, empirical) data and observations despite earlier claims to the contrary. This is one of many confusions and muddled writing/thinking that the book suffers from. It also begs the question, well-known to Austrians, of what interpretations of the significance of various historical data could tell us on their own without any kind of intermediating and pre-selected theory applied to them.

History, as a discipline, is a process of careful selection of particular facts for a particular purpose. The past provides us with a nearly infinite quantity and quality of data to choose from. It is the task of the historian to pick from this quantity only the data that is relevant to examining a particular historical question. To do this, the historian must already be versed in valid theories from the applicable branches of science to which his question belongs. For example, a historian studying the incidence, severity and consequences of disease would need to understand human biology and epidemiology. Or a historian studying the history of money in France circa 1750-1850 would need to already understand monetary theory (a branch of economics) as well as other theoretical knowledge pertaining to the historical episode (for example, a theory of the State in general and a theory of post-Medieval French statism in particular).

We can not validate an economic theory by looking at the historical record. All we’d manage to do is to assume that which we’re trying to prove and thereby fool ourselves.

This gets us to the second claim. To reiterate, while it is true that economics is not a science “like” physics or chemistry (pertaining to the necessary differences in methodology), it is NOT true that economics is not a science in that it offers one right answer to a given question. If economics can not offer objective truths about universal causal relationships, then it would not be a science, it would be a canon of opinion and not worth studying any more than studying people’s opinions on the superiority of vanilla versus chocolate ice cream is worth studying. It would not be productive to write books about economics, it would be pointless to try to explain economics to other people and ultimately, any arguments or claims about one economic phenomenon or another would be arbitrary. This would be the position of philosophical nihilism in the realm of economics.

It’s hard to believe that this is what HJC personally believes or is advocating because it would then make most of the rest of what he has to say about economics empty of content and meaning. It would also make puzzling comments such as “95% of economics is common sense” as nihilism in any realm is typically not the common sense position, not to mention that the concept of “making sense” implies rationalizeable facts about reality. Yet, this is what this man, who is an economics PhD and responsible for instructing others in the philosophy, claims is the “state of the art.”

And thus we arrive at the third claim about economics which is almost the most puzzling of all. We’re admittedly early on in the book so I hope HJC is going to spend some time explaining the meta-epistemology of how one can know which circumstances call for the application of which economic arguments but it is already seeming like a muddled concept because we’ve rejected the idea that we can look at history as a source of theory about economics, and we’ve rejected the idea that economics is devoid of any content and meaning whatsoever and thus “non-scientific.” This would only leave one alternative to mind, that of logical deduction from axiomatic assumptions to arrive at conclusions which must be true.

It’s worth noting at this time that the Austrian school provides a special comment to this concept that economic arguments must be chosen and applied based on a specific moral or value-based perspective. The Austrians argue that to be scientific (“objective”), economics must be wertfrei, or value-free. That is, the knowledge of economics is not dependent upon the economist’s class, creed, race, nationality, personal preferences or other personal identifications. It is dependent upon logic which universally belongs to all mature human beings and is necessarily embedded in the biological structure of the mind.

Economics is not a tool for furthering a particular interest group’s agenda. It describes causal relationships between specific phenomena, ie, “If X, then Y” and it comments on whether specific ends aimed at can be achieved with specific means employed– NOT whether the ends aimed at are “good”, “right”, “holy”, “moral”, “desirable”, “valuable,” etc. For example, economics can help us understand the consequences of certain actions undertaken by human beings, but it can not tell us if those consequences are good, bad, etc. It simply tells us, “If you do this action, it will lead to this consequence, all else equal.”

I think this is a very different position than the one taken by HJC in the text and I look forward to exploring this idea and its implications in contrast to HJC’s claims further on as it seems inevitable he’s going to have to come back and explain this more eventually.

So what is economics?

From HJC’s comments so far, it’s unclear if he believes economics is a science. But because the book doesn’t end here, we’ll operate from the assumption for now that he believes it is a science. The question then becomes, what is the proper scope of economics as a science?

Here HJC levels his criticism mostly at popular, mainstream and “neoliberal” economists following what is termed neoclassical economics. Citing a contemporary (and former critic) of Keynes, Lionel Robbins, HJC says,

Robbins defined economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’

He claims that most economists

define their subject in terms of its theoretical approach, rather than its subject matter

based off of Robbins’ logic. In other words, economics is a study of “rational choice” and focuses on the calculations entertained by people choosing between specific means to achieve specific goals in a variety of circumstances (choosing a spouse, choosing what to eat, choosing where to work, choosing what to invest in).

In contrast, HJC offers his definition of economics:

My belief is that economics should be defined not in terms of its methodology, or theoretical approach, but in terms of its subject matter, as is the case with all other disciplines. The subject matter of economics should be the economy – which involves money, work, technology, international trade, taxes and other things that have to do with the ways in which we produce goods and services, distribute the incomes generated in the process and consume the things thus produced – rather than ‘Life, the Universe and Everything’ (or ‘almost everything’), as many economists think.

In other words,

what we want from economics is the best possible explanation of various economic phenomena

It’s hard to argue with the idea that economics should be defined by its subject matter like any other science. Of course, the preceding paragraphs in the book up to this point are a litany of potential subject matter according to HJC versus those he criticizes in the neoclassical mainstream, which seems to beg the question.

And HJC even makes a point about subject matter that Austrians would sympathize with, namely that

The economics profession, and the rest of us whose views of the economy are informed by it, need to pay far more attention to production than currently [because] production is the ultimate foundation of any economy

This is a criticism leveled by Austrians at Keynesians with regards to macroeconomics, namely that there is an undue focus on consumption patterns and an incorrect emphasis on consumption (“aggregate demand”) as the driving energy of an economy without study or consideration of the productive activity necessary to enable it.

As a matter of comparison, it’s worth considering the thoughts of Austrian economics patriarch Ludwig von Mises on the questions of whether economics is a science and, if so, how to define it. The following passages are from Mises’ 1949 “Human Action“:

Economics is the youngest of all sciences. In the last two hundred years, it is true, many new sciences have emerged from the disciplines familiar to the ancient Greeks. However, what happened here was merely that parts of knowledge which had already found their place in the complex of the old system of learning now became autonomous. The field of study was more nicely subdivided and treated with new methods; hitherto unnoticed provinces were discovered in it, and people began to see things from aspects different from those of their precursors. The field itself was not expanded. But economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and interdependence of market phenomena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.

Thoughts so far– economics is a science, it is the youngest of sciences, it revealed new knowledge about observed market phenomena and this knowledge was separate and distinct from existing sciences (that is, economics is not a branch of a then-existing science, such as psychology). Mises continues,

Philosophers had long since been eager to ascertain the ends which God or Nature was trying to realize in the course of human history. They searched for the law of mankind’s destiny and evolution. But even those thinkers whose inquiry was free from any theological tendency failed utterly in these endeavors because they were committed to a faulty method. They dealt with humanity as a whole or with other holistic concepts like nation, race, or church. They set up quite arbitrarily the ends to which the behavior of such wholes is bound to lead. But they could not satisfactorily answer the question regarding what factors compelled the various acting individuals to behave in such a way that the goal aimed at by the whole’s inexorable evolution was attained.

Whether or not we define economics by its methodology, it is clear that in Mises’ mind, the discovery of a valid method for economics was one of the critical pillars of its emergence as a science. Prior observers witnessed mass phenomena, but had no method for explaining how component behavior led to the mass phenomena. Again, Mises continues,

Other philosophers were more realistic. They did not try to guess the designs of Nature or God. They looked at human things from the viewpoint of government. They were intent upon establishing rules of political action, a technique, as it were, of government and statesmanship. Speculative minds drew ambitious plans for a thorough reform and reconstruction of society. The more modest were satisfied with a collection and systematization of the data of historical experience. But all were fully convinced that there was in the course of social events no such regularity and invariance of phenomena as had already been found in the operation of human reasoning and in the sequence of natural phenomena. They did not search for the laws of social cooperation because they thought that man could organize society as he pleased.

If there are no “regularities in the sequence and interdependence of market phenomena”, that is, no universal scientific laws of cause and effect, then any social schemer’s vision for reforming society should be possible. The only thing that could get in the way of such a scheme would be purposeful obstruction or moral flaws in the individuals in society with whom the scheme is concerned. Instead, says Mises,

The discovery of the inescapable interdependence of market phenomena overthrew this opinion. Bewildered, people had to face a new view of society. They learned with stupefaction that there is another aspect from which human action might be viewed than that of good and bad, of fair and unfair, of just and unjust. In the course of social events there prevails a regularity of phenomena to which man must adjust his actions if he wishes to succeed. It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value. One must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be–this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action.

Now we’re getting into the juicy part of the epistemological differences of the Austrians and an economist like HJC. First, Mises is describing the history of philosophy here. He is talking about the historical emergence of economics as a scientific discipline a couple hundred years ago (writing in 1949, he would be relating events that took place from approximately 1749 onward, and he is purposefully glossing over the proto-economic thought of groups like the Spanish scholastics as well as various contributions made by those in the Eastern philosophical traditions) and the impact on social thought and social events that followed. Consider, for example, HJC’s reference to Adam Smith’s “The Wealth of Nations”, which put forth one of the first serious philosophical challenges to the then predominant “mercantilist” thought of contemporary political economy, a “technique of government and statesmanship” as Mises termed it.

Second, consider how radical this emergence was then, and how radical it is in the face of what HJC is saying now. As we will see very shortly, HJC provides a revisionist “history of capitalism” and spends most of his effort trying to make the claim that much or most of what is historically appreciated as the capitalist industrial development of the Western world did not occur via free markets and free trade, but rather through a series of calculated tariff and other regulatory structures, “techniques of government and statesmanship.” The Misesian/Austrian argument, then, is not that Western capitalism was developed through state intervention but that the remarkable economic development of the West took place in spite of these “techniques of government and statesmanship” which were implemented in ignorance or disregard for the existence of “regularities in the sequence and interdependence of market phenomena”.

Finally, then, note that Mises is directly supporting the claim that economics is a science with discoverable, constant laws of cause and effect (like physics) and therefore “one truth” in answer to a given question, but that the methodology of economics is not based on empirical experimentation (unlike physics) and that it was the radical departure from “ought” and the new focus on “is” that allowed economics to emerge as an objective and true science. This is somewhere close to the polar opposite claim HJC is making when he argues that economics involves learning to figure out which of many competing intellectual school’s claims should be applied as an explanation to a given set of observed economic phenomena based on their pre-existing moral or value systems (“oughts”).

And Mises does HJC one better:

For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action,praxeology. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.

Now this is powerful stuff and, based on HJC’s lampooning earlier in the chapter of “Economics: A User’s Guide”, the author would likely find this perspective quite challenging at first. As HJC laments, economists seem to think that economics explains “life, the universe and everything.” To this point, Mises replies, “No, economics does not explain this– but praxeology comes close.”

Now is probably a good time to refer to my notes from “Lecture 1” of the 2014 Rothbard Graduate Seminar. For Austrians, praxeology is the broader science studying all human choice (“rational choice” from earlier?), of which economics is a dependent part and probably best developed. Political economy would also be a branch of praxeology, or as Austrians refer to it, the theory of violent intervention in the market (although it’s questionable whether war is a subset of praxeology, or of violent intervention in the market). And within economics, the area best developed and most relevant for the purposes of most people on planet earth, yesterday, today and tomorrow (sorry, Zeitgeisters/Singularityists/Post-Scarcity Societyists) is the branch of economics known as catallactics, or the theory of exchange and especially money exchange.

In future book blogs, these particular issues of methodology and epistemology will undoubtedly be returned to as they form the core disagreement between most economic schools of thought, including HJC, neoclassicalism and the Austrian school. In the next installment, we’ll move on to HJC’s revisionist treatment of the “history of capitalism.”

How Does Amazon Avoid Creating It’s Own Mini-Depression?

According to a new article at Slate, Amazon will soon (within the next 12 months) be offering it’s Kindle e-reader device for “free.” Here’s the part of the story that interested me the most:

Every time Amazon drops the price of the Kindle, sales of the device and sales of Kindle books increase dramatically.

This is curious. According to conventional economic views of the business-cycle, depressions occur when nominal price shocks occur in the economy which reduce the amount of aggregate spending, promoting further price decreases by businesses, which lead to even more reductions in spending as consumers become convinced that if they just wait a little bit longer, they can buy what they need at a lower price.

Next thing you know, spending has collapsed into the notorious and much-feared “death spiral” and the economy grinds to a halt. Mass unemployment, the fall of social morality and Huns impaling the babies of screaming mothers on top of their bayonets. The yooj.

But at Amazon, every time they lower prices, people spend more.

How come when Amazon does it, it creates more business and an environment where everyone (consumers and Amazon as a business) prospers, but when it happens in the economy at large, we get a death spiral and impaled babies?

Somewhere, there’s a disconnect between micro and macro. The secret (that the Keynesians never share and refuse to explain) is how and why this necessarily happens. Good luck figuring it out, I still haven’t!

The Total Vapidity Of Modern Economic Thinkers

Here are three responses to the prompt, “Identify the biggest unanswered questions in economics and predict what breakthroughs will define it a decade or two hence” from some of the so-called brightest young minds in economic thinking today. But beware– one of the three is a parody, not a sincere response.

Response #1

I see a big payback to integrating psychology, anthropology, and history into economics more directly, using real-world data to understand how prices, output, and inequality relate to institutions, norms, education, and taxes. And vice versa.

Response #2

The modeling of agents with bounded rationality will help us build economic models (in particular, macroeconomic and financial models) and institutions that better take into account the limitations of human reason.

Reason #3

In an increasingly globalized world, the search for answers will necessarily require a much deeper understanding of three areas that interest me. One, we need a better understanding of the interlinkages across countries in trade, finance, and macroeconomic policy.

Which is which? For the answer, visit Eric Falkenstein’s blog.

Notes – Gary North On Inflation, Deflation And Japan

The following notes cover Austrian economist Gary North’s views on the chances of inflation and deflation in the US and Japanese monetary systems, derived from a 5-part article series on the subject found at LewRockwell.com:

Why Deflation Is Not Inevitable (Sadly), Part 1: John Exeter’s Mistake

  • Fed will attempt to stabilize money supply before hyperinflation; “mass inflation, yes; hyperinflation, no. Then deflation.”
  • Deflation will not take place unless the CB stops making new money
  • When prices fall, you are richer, but you pay no income tax on your profits (deflation is good)
  • Not-money: if you pay a commission to exchange, the asset is not truly liquid
  • Gold is a mass inflation hedge, not a deflation hedge
  • According to Exter/deflationists, gold is supposedly both an inflation hedge and a deflation hedge– the only asset possessing this virtue
  • We have never been able to test Exter’s theory of gold as a hedge against price deflation because there has never been a single year in which CPI has fallen (Q: what did gold price of Yen do in 2009 Japanese CPI decrease?)
  • Consumer price indexes should be based upon goods and services that are rapidly consumed; not price of homes and other prices of “markets for dreams”
  • Central banks inflate, they do not deflate
  • “When housing is bought on the basis of ‘I’ll get rich,’ the market begins to resemble a stock market. When it is bought on the basis of ‘I can live here for what I can rent,’ it is more like the toilet paper market”
  • The skyrocketing price of housing under Greenspan was not reflected in the CPI; the collapsing price of housing under Bernanke was not reflected in the CPI
  • Consumer prices did not fall during the 2008-09 crisis because the money supply did not fall; if the money supply shrinks, there will be price deflation; watch the monetary statistics

Why Deflation Is Not Inevitable (Sadly), Part 2: The Deflationists’ Myth of Japan

  • The money supply shrank in the US 1930-33 (Q: Why did the Fed allow money supply to shrink? Does this weaken North’s argument that the Fed will always inflate rather than deflate going forward?)
  • The US and Japan had similar CB policies until late 2008, when the Fed “went berserk”
  • Japan’s M2 was mildly inflationary from 1992-2009; CPI was slightly deflationary over the same period of time but never worse than 1% in any 12mo period; prices rose 2% 1997 and 2008
  • There has been no systemic price deflation in Japan
  • Japan is more Chicago School than Austrian
  • Statistical conclusions about Japan:
    • CPI in Japan fell little 1992-2009, no more than 1% per annum
    • BoJ did not inflate the currency to overcome systemic price deflation, because it didn’t exist
    • Collapse of Japanese RE prices did not affect CPI
    • Collapse of Japanese stock market prices did not affect CPI

Why Deflation Is Not Inevitable (Sadly), Part 3: Why Currency Withdrawals Don’t Matter

  • The Japanese economy is starting to become price competitive; this will have ramifications higher up the corporate command chain
  • Estimates of US currency held outside the United States range from 50-70%
  • Rise of credit transactions such as credit cards have minimized the role paper currency plays in everyday transactions
  • Currency withdrawals from the banking system which are not later redeposited are deflationary due to the reserve ratio mechanism
  • Monetary deflation can occur as a result of deliberate Fed policy:
    • increase legal reserve requirement
    • sell assets
    • allow bank collapse to occur by not funding FDIC with new money to offset withdrawals

Why Deflation Is Not Inevitable (Sadly), Part 4: High Bid Wins

  • All economics systems are governed by principles of:
    • supply and demand
    • high bid wins
  • The increase in the Fed’s balance sheet (monetary base) has been offset by increase in excess reserves held at banks; thus, no price increases
  • Deflationists’ claim: “Commercial banks will not start lending until the recovery is clear. The recovery is a myth. So, banks will not start lending, no matter what the FED does. The largest banks remain over-leveraged. They will not be able to find borrowers at any rate of interest, so the capital markets will collapse (except gold), and then consumer prices will fall.”
  • North’s response: “the largest banks are making money hand over fist. It is the local banks that are failing. The FED has done what it was set up to do in 1913: protect the largest banks.”
  • Inflationists’ claim: “Commercial banks will start lending when the recovery is clear. The FED will probably not contract the monetary base all the way back to August 2008, because this would bring on another crisis comparable to September 2008. The FED will not risk bankrupting the still highly leveraged megabanks. It will therefore not fully offset the decrease in excess reserves. It will not “wind down” all the way, if at all. Bernanke fears 1930—33 more than anything else. So, the money supply will rise. Prices will follow.”
  • “The increase in excess reserves has been voluntary. The bankers are afraid to lend, even to the U.S. Treasury.” (Q: Why are bankers afraid to lend, even to the Treasury?)
  • “The FED is in complete control over excess reserves. It pays banks a pittance to maintain these reserves. It is legally authorized to impose fees.”
  • Why the Fed maintains its current policy:
    • doesn’t have to sell assets
    • doesn’t have to face rising long-term interest rates due to expanding money supply
    • doesn’t have to worry about collapsing housing market as interest rates go to 25-40%
    • doesn’t face a corporate bond market collapse
  • Monitoring money supply changes is key to predicting consumer price increases

Why Deflation Is Not Inevitable (Sadly), Part 5: Conclusion

  • J Irving Weiss and his son Martin, recommended 100% T-Bills since 1967; it takes $6400 to buy what $1000 bought in 1967
  • Deflationists confuse asset prices with consumer prices
  • Deflationists believe low interest rates lead to debt build up but lower ones won’t stabilize; cost of capital can fall to zero and no one will borrow
  • This is John Maynard Keynes theory, who therefore recommended the government should borrow and spend to avoid this fate
  • There is not a shortage of borrowers today, corporate bond rates are around 6%, not 0%, implying there are people looking to borrow at positive rates of interest
  • Capital markets — markets for dreams, priced accordingly
  • Consumer prices rise comparably to increases in M1 in the US and M2 in Japan
  • Deflationists confuse money (in a bank account) with dreams (imputed asset prices in capital markets)
  • At the supermarket, prices are slowly rising in the US and slowly falling in Japan