talking about sound economics ...
Don't Bet on Recovery By Peter Schiff
Published 03/04/10
"It is astounding how many economists, government officials, and Wall Street strategists construe the current economic conditions as evidence of a bona fide recovery. It is a testament to the power of the rose colored glasses handed out by our nation's leading universities that such a feeling could be widely held despite the clear and present danger that compounds daily. The myopia leads us to enact policies that actually exacerbate our problems. The "remedies" are postponing, perhaps indefinitely, a true recovery.
The oracles who have described the nature of this imminent recovery do so based on their conviction that consumer spending is slowly returning to levels that existed prior to the recession. New data released today seems to support this view, with consumer spending up 0.5% in January.
However, missing from their analysis is any plausible explanation as to why consumers will be able to sustain such spending given the plunge in income and credit, and the lack of available savings. In fact, the same January spending report showed that personal income increased by only 0.1%, while the savings rate slowed to the smallest since 2008.
I would challenge those who fantasize about a consumer-led recovery to describe where the spending money will come from. Most consumers are tapped out, millions are unemployed, and home equity has been wiped out. The only reasonable thing for them to do is to pay down debt and sock away as much money as possible to rebuild their savings.
Beyond the question of "how" the spending could be achieved, is the deeper question of "why" such activity should be sought at all. Excessive spending, fueled by an insane housing bubble and catalyzed by reckless monetary and fiscal policy, was the reason that our current recession became unavoidable. Why would we want to go down that road again?
During the run up to the crash, excess spending had created economic distortions that have yet to be resolved. Too many resources, including land, labor, and capital, were devoted to servicing an unsustainable economic model in which Americans borrowed money to buy homes, products and services they really could not afford. In many cases consumer behavior was influenced by overly optimistic assumptions regarding real estate related riches.
However, now that the real estate bubble has burst, Americans are coming to terms with a more sober reality. Many have cut up their credit cards, dramatically reduced their spending, and have squirreled away as much money as they can. This change in behavior should necessitate a dramatic shift in the labor market as workers move away from jobs associated with consumer spending and toward jobs associated with real production, primarily for exportable goods.
The real problem is that monetary and fiscal policy designed to re-inflate the burst spending bubble is preventing this transition from taking place. As a result we are not creating the jobs we need to replace -- the ones we have lost in mortgage servicing, home improvement, and real estate sales (which we never really needed to begin with). As these jobless remain unable to find alternative employment, our economy will continue to languish.
Some will argue that the new jobs created by government stimulus spending will provide the additional purchasing power necessary to revitalize consumer spending. There are two problems with this expectation. First, those jobs being "created" by the government are outnumbered by those being destroyed by government domination of resources. Second, even if it were possible for job growth to return, having hopefully learned from their mistakes, workers will be far more frugal with their paychecks than they were in the past.
Others hope that rising real estate prices will give consumers more confidence to spend. The reality is that housing prices are still too high and will likely fall further. But even if they did rise, consumers will still be reluctant to resume their shopping spree. Home equity extraction loans, which just a few years ago turned houses into ATMs, are now much harder to come by. When it comes to spending, it's not just about confidence; it's about cash.
The only possible way consumers can spend is if the government gives them the money. However, since the government cannot legitimately give money to one American without first taking it from another, the most likely means of doling out cash will be to run it off the printing presses.
That, in a nutshell, is our government's plan for economic recovery. Print a bunch of money and give it to consumers to spend. This is not a plan for recovery but a recipe for disaster. Those betting that this program can succeed in putting together a healthy and sustainable economy simply do not understand the nature of their wager. The smart money is going the other way."
Peter Schiff
http://www.campaignforliberty.com/article.php?view=661and some history on the Austrian school of economics
Money and the Individual By Murray Rothbard
Published 03/03/10
"Ludwig von Mises's The Theory of Money and Credit is, quite simply, one of the outstanding contributions to economic thought in the 20th century. It came as the culmination and fulfillment of the "Austrian School" of economics, and yet, in so doing, founded a new school of thought of its own.
The Austrian School came as a burst of light in the world of economics in the 1870s and 1880s, serving to overthrow the classical, or Ricardian, system which had arrived at a dead end. This overthrow has often been termed the "marginal revolution," but this is a highly inadequate label for the new mode of economic thinking. The essence of the new Austrian paradigm was analyzing the individual and his actions and choices as the fundamental building block of the economy.
Classical economics thought in terms of broad classes, and hence could not provide satisfactory explanations for value, price, or earnings in the market economy. The Austrians began with the actions of the individual. Economic value, for example, consisted of the valuations made by choosing individuals, and prices resulted from market interactions based on these valuations.
The Austrian School was launched by Carl Menger, professor of economics at the University of Vienna, with the publication of his Principles of Economics (Grundsätze der Volkswirtschaftstehre) in 1871.[1] It was further developed and systematized by Menger's student and successor at Vienna, Eugen von Böhm-Bawerk, in writings from the 1880s on, especially in various editions of his multivolume Capital and Interest. Between them, and building on their fundamental analysis of individual valuation, action, and choice, Menger and Böhm-Bawerk explained all the aspects of what is today called "microeconomics": utility, price, exchange, production, wages, interest, and capital.
Ludwig von Mises was a "third-generation" Austrian, a brilliant student in Böhm-Bawerk's famous graduate seminar at the University of Vienna in the first decade of the 20th century. Mises's great achievement in The Theory of Money and Credit (published in 1912) was to take the Austrian method and apply it to the one glaring and vital lacuna in Austrian theory: the broad "macro" area of money and general prices.
For monetary theory was still languishing in the Ricardian mold. Whereas general "micro" theory was founded in analysis of individual action, and constructed market phenomena from these building blocks of individual choice, monetary theory was still "holistic," dealing in aggregates far removed from real choice. Hence, the total separation of the micro and macro spheres. While all other economic phenomena were explained as emerging from individual action, the supply of money was taken as a given external to the market, and supply was thought to impinge mechanistically on an abstraction called "the price level." Gone was the analysis of individual choice that illuminated the "micro" area. The two spheres were analyzed totally separately, and on very different foundations. This book performed the mighty feat of integrating monetary with micro theory, of building monetary theory upon the individualistic foundations of general economic analysis.
Eugen von Böhm-Bawerk died soon after the publication of The Theory of Money and Credit, and the orthodox Böhm-Bawerkians, locked in their old paradigm, refused to accept Mises's new breakthrough in the theory of money and business cycles. Mises therefore had to set about the arduous task of founding his own neo-Austrian, or Misesian, school of thought. He was handicapped by the fact that his post at the University of Vienna was not salaried; yet, all during the 1920s, many brilliant students flocked to his Privatseminar.
In the English-speaking world, acceptance of Misesian ideas was gravely hampered by the simple but significant fact that few economists read any language other than English. Mises's The Theory of Money and Credit was not translated into English until 1934, and the result was two decades of neglect of the Misesian insights. Cash-balance analysis was developed in the late 1920s in England by Sir Dennis H. Robertson, but his approach was holistic and aggregative, and not built out of individual action.
The purchasing-power-parity theory came to England and the United States only through the flawed and diluted form propounded by the Swedish economist Gustav Cassel. And neglect of the Cuhel-Mises theory of ordinal marginal utility allowed Western economists, led by Hicks and Allen in the mid-1930s, to throw out marginal utility altogether in favor of the fallacious "indifference curve" approach, now familiar in micro textbooks.
Mises's integration of micro and macro theory, his developed theory of money and the regression theorem, as well as his sophisticated analysis of inflation, were all totally neglected by later economists. The idea of integrating macro theory on micro foundations is further away from current economic practice than ever before.
Only Mises's business-cycle theory penetrated the English-speaking world, and this feat was accomplished by personal rather than literary means. Mises's outstanding follower, Friedrich A. von Hayek, immigrated to London in 1931 to assume a teaching post at the London School of Economics. Hayek, who had concentrated on developing Mises's insights into a systematic business-cycle theory, managed quickly to convert the best of the younger generation of English economists, and one of the brightest of the group, Lionel Robbins, was responsible for the English translation of The Theory of Money and Credit.
For a few glorious years in the early 1930s, such youthful luminaries of English economics as Robbins, Nicholas Kaldor, John R. Hicks, Abba P. Lerner, and Frederic Benham fell under the strong influence of Hayek. In the meanwhile, Austrian followers of Mises's business-cycle theory — notably Fritz Machlup and Gottfried von Haberler — began to be translated or published in the United States. Also in the United States, young Alvin H. Hansen was becoming the leading proponent of the Mises-Hayek cycle theory.
Mises's business-cycle theory was being adopted precisely as a cogent explanation of the Great Depression, a depression that Mises anticipated in the late 1920s. But just as it was being spread through England and the United States, the Keynesian revolution swept the economic world, converting even those who knew better. The conversion process won, not by patiently rebutting Misesian or other views but simply by ignoring them — and leading the economic world into old and unsound inflationist views dressed up in superficially impressive new jargon.
By the end of the 1930s, only Hayek, and none of the other students of himself or Mises, had remained true to the Misesian view of business cycles. Mises's The Theory of Money and Credit, in its English version, barely had time to be read before the Keynesian revolution of 1936 rendered pre-Keynesian thought, particularly on business cycles, psychologically inaccessible to the next generation of economists.
Mises added part four to the 1953 English-language edition of The Theory of Money and Credit. But Keynesian economics was riding high, and the world of economics was scarcely ready to resume attention to the Misesian insights. Now, however, and particularly since his death in 1973, Misesian economics has experienced a remarkable resurgence, especially in the United States. There are conferences, symposia, books, articles, and dissertations abounding in Austrian and Misesian economics.
With the Keynesian system in total disarray, reeling from chronic and accelerating inflation punctuated by periods of inflationary recession, economists are more receptive to Misesian cycle theory than they have been in four decades. Let us hope that this new edition will stimulate economists to reexamine the other sparkling insights in this grievously neglected masterpiece, and that Mises's integration of money and banking with micro theory will serve as the basis for future advances in monetary thought."
Murray Rothbard
http://www.campaignforliberty.com/article.php?view=660
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