Debunking Austrian economics and Ron Paul?

[solly_gratia]

I came across this article, but the techno-babble goes over my head, and was wondering if anyone could talk me through it. It strikes me as somewhat pretentious to say that a long time observer of the Us economic system could be so ‘wrong’ but that’s the claim. The main idea the writer is putting across seems to be that in the system he says operates in the US, the relevant parties can do whatever they want without any economic comeback, because it’s just numbers on a computer: the joys of FIAT money. IOW, crisis? what crisis?

Thanks

http://pragcap.com/debunking-ron-pauls-talking-points

[Think_Blue]

This is known as Chartalism (a.k.a. Modern Monetary Theory - MMT):

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

http://mises.org/daily/5260

[solly_gratia]

Thanks for the links. I see I got the nub of it right. I hadn’t heard of MMT before, but it seems to be the kind of theory in which one climbs up a ladder, and then pulls the ladder up after you. Smoke and mirrors hiding behind techno-babble.

It’s funny that he describes AE as technical, since I can grasp that fairly easily!

[accpetancetake]

This was almost more painful to read than Paul Krugman. He basically says we don’t have a debt crisis because we have a printing press, lol! Yeh, so what’s the solution, print away the deficit and experience hyperinflation? That is a debt crisis because if we don’t cut back the debt, we’d have the dollar take a beating.

lol - treasuries are safe? Maybe in nominal terms, but not if the Fed is going to have to print money to buy them - potentially making their real interest rate,- oh wait, a lot of Treasury debt is already yielding negative real interest rates - negative. And that’s using the government’s own numbers! How is that safe???

I can’t go on, articles like these make me lose faith in humanity - and the fact there are so many supportive comments .

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[Neodoxy]

Pretty bad arguments. Don’t feel like doing a full critique but

1. We can’t print off all of the money in the world. Other people other than Ron Paul are talking about the debt, indeed EVERYONE is talking about the debt. You are moving debt around because debt accumulates to other people, you are dumping debt on them. You’re assuming the federal reserve will act in the best possible way and that the amount of inflation, combined with, more importantly, the expectation of the inflation will not cause a huge devaluation in the dollar and harm the living standards of American citizens and cause deeper fluctuations throughout the world economy

2. I agree that right now Paul’s plan would probably lead directly to a recession. Such a dramatic downfall in demand in a system where prices are bred to be relatively sticky in anticipation of inflation and government stimulus would cause deep harm to living standards in the short run and large unemployment would result. With this being said this is entirely because of the toxic height of government spending and pervasiveness of policy/regulation. Such a collapse is going to come some time with such a high debt level and utter deadlock in Washington

[Jargon]

@Neodoxy

Pretty bad arguments. Don’t feel like doing a full critique but

1. We can’t print off all of the money in the world. Other people other than Ron Paul are talking about the debt, indeed EVERYONE is talking about the debt. You are moving debt around because debt accumulates to other people, you are dumping debt on them. You’re assuming the federal reserve will act in the best possible way and that the amount of inflation, combined with, more importantly, the expectation of the inflation will not cause a huge devaluation in the dollar and harm the living standards of American citizens and cause deeper fluctuations throughout the world economy

What would be the best way for the federal reserve to act? Who can they extend money to that doesn’t need a huge haircut immediately?

2. I agree that right now Paul’s plan would probably lead directly to a recession. Such a dramatic downfall in demand in a system where prices are bred to be relatively sticky in anticipation of inflation and government stimulus would cause deep harm to living standards in the short run and large unemployment would result. With this being said this is entirely because of the toxic height of government spending and pervasiveness of policy/regulation. Such a collapse is going to come some time with such a high debt level and utter deadlock in Washington

I don’t think that Paul would cut welfare, but I do think he would cut federal departments and war spending, some going to tax cuts some going to paying off the debt. I think this is a good strategy. Anyways, Paul can’t control the federal reserve he can only yell at them, so the initiation of a monetary deflation would be up to the stooges. The important thing about the recession that probably would occur under a Paul presidency is that it would find a bottom. Prices could hit the floor, and then investors would start investing. There would be no regime uncertainty, deregulation, and detaxation which would be a solid place to start building again rather than everyone today getting worked up about Obama’s supposed marxist anti-capitalist leanings.

[Neodoxy]

"What would be the best way for the federal reserve to act? "

If they want to keep the current system in tact? Curb credit expansion as much as possible in other areas and focus all of their energies in expanding credit just enough to pay off debt. This could well cause a problem in terms of an increase in interest rates but its probably better than the alternative.

"Anyways, Paul can’t control the federal reserve he can only yell at them, so the initiation of a monetary deflation would be up to the stooges. "

I’m pretty sure if Paul really wanted to then he could disband the federal reserve, even though realistically without some very tough and extensive measures which most certainly require the attention of congress, this would lead to total monetary collapse and economic chaos the likes of which mere mortals could not possibly imagine. No, but seriously, that would be BAD.

“The important thing about the recession that probably would occur under a Paul presidency is that it would find a bottom. Prices could hit the floor, and then investors would start investing.”

I’m personally very worried about where that floor is, and I’m extremely dubious of the democratic system allowing us to get there. I also think that with the kind of unpredictability that this would cause in markets, there could be even more dire consequences. People aren’t used to this. Firms aren’t used to this, analysts would be crying utter doomsday. The idea of a natural recovery in such a thing is unheard of for the common man. With this said, VERY good point about regime uncertainty, which I think is an underated cause of polonging the crisis. However, do you think that there would really be regime certainty with that little branch of government called “congress”?

[Jargon]

@Neodoxy

If they want to keep the current system in tact? Curb credit expansion as much as possible in other areas and focus all of their energies in expanding credit just enough to pay off debt. This could well cause a problem in terms of an increase in interest rates but its probably better than the alternative.

So keep buying treasuries? But this all depends on how much can be cut from the budget, which is something that Paul would be capable of doing to a significant extent.

I’m pretty sure if Paul really wanted to then he could disband the federal reserve, even though realistically without some very tough and extensive measures which most certainly require the attention of congress, this would lead to total monetary collapse and economic chaos the likes of which mere mortals could not possibly imagine. No, but seriously, that would be BAD.

Specifically, what do you think would happen if Paul disbanded the Fed with an executive order and then, say, instituted a gold standard?

I’m personally very worried about where that floor is, and I’m extremely dubious of the democratic system allowing us to get there. I also think that with the kind of unpredictability that this would cause in markets, there could be even more dire consequences. People aren’t used to this. Firms aren’t used to this, analysts would be crying utter doomsday. The idea of a natural recovery in such a thing is unheard of for the common man. With this said, VERY good point about regime uncertainty, which I think is an underated cause of polonging the crisis. However, do you think that there would really be regime certainty with that little branch of government called “congress”?

I agree that the democratic system is probably the biggest obstacle to rebuilding a sound economy, but it’s the best Paul can do to ensure people that he wants to let the market do its thing and cut taxes. Remember that the great depression was only as bad as it was because they didn’t let the prices of anything come down: labor, food, whatever. Paul would do no such thing in this situation. I actually have faith that he could command control from congress not only because of the increasing potential of the executive branch in recent years but also because he could school any congressman on the floor about economics and history.

It would suck big time for a lot of people, but the capital goods would still all be there. The cars, railroads, and factories would still be there. It would just be a really harsh adjustment, but without the state to prevent a recovery it could probably be a much less worse situation than the great depression.

[Neodoxy]

“So keep buying treasuries? But this all depends on how much can be cut from the budget, which is something that Paul would be capable of doing to a significant extent.”

Yes, but simply for federal reserve policy and paying down the debt it’s one of the only options for keeping America afloat if the budget isn’t fixed (lol)

“Specifically, what do you think would happen if Paul disbanded the Fed with an executive order and then, say, instituted a gold standard?”

It would have to work in the opposite order with a gold standard instituted first, fed abolished second. The moment that the federal reserve is abolished in today’s economy then dollars become useless specifically because people believe that the system will be useless and so start to call in debts from banks ECT.
At any rate I don’t know what that would look like in the slightest, the move back to the gold standard from a top down direction is an utterly arcane concept when we look at how historically that’s never really been done to my knowledge. In cases where they went from fiat to commodity there was always some currency to bounce off of in one way or another, this isn’t the case today with the international fiat system the way it is. The whole problem comes in with this question: What would the exchange ratio be? It would also be interesting to see what happened in the short term if it did happens and gold began to be bought up by banks and the like.

“Remember that the great depression was only as bad as it was because they didn’t let the prices of anything come down: labor, food, whatever. Paul would do no such thing in this situation. I actually have faith that he could command control from congress not only because of the increasing potential of the executive branch in recent years but also because he could school any congressman on the floor about economics and history.”

Good job on knowing that, people even around here underestimate the true damage done by Hoover with his policies that caused prices to stagnate or be able to adjust at a time when they needed to the most, especially with labor (which in turn helped to lead Keynes to argue that wages were sticky downwards and that the free market couldn’t work). With this being said I honestly believe you’re being extremely optimistic. If we look at the stupidity, hard headedness, and inability to cooperate that’s going on in congress right now, people aren’t willing to compromiste, make hard decisions, or cast away potential votes, they just aren’t. The super committee showed that the “leaders of this country” are prepared to watch it, and the world economy BURN, before doing something that might offer up their seats to the idiotic hordes of the American populace who they claim to serve.

“It would suck big time for a lot of people, but the capital goods would still all be there. The cars, railroads, and factories would still be there. It would just be a really harsh adjustment, but without the state to prevent a recovery it could probably be a much less worse situation than the great depression.”
Probably true. The favorite would be a slow phasing out of government spending which would prevent anything close to a depression (cut 5 percent of the current budget by 5 percent for 16 years or so) but this will not happen. I don’t know how bad the depression would be. This cannot be said a priori, but it would be terrible. I believe strongly it would reach great depression levels, but I do not know how long. If it were all left to the market, and governments around the world did nothing, then I would say it would guess 5 years is what it would take for a healthy recovery. With this said, foreign action, even if domestic action is secured, could be fatal. The actions of state and local governments should not be forgotten either

[Jargon]

@Neodoxy

It would have to work in the opposite order with a gold standard instituted first, fed abolished second. The moment that the federal reserve is abolished in today’s economy then dollars become useless specifically because people believe that the system will be useless and so start to call in debts from banks ECT.
At any rate I don’t know what that would look like in the slightest, the move back to the gold standard from a top down direction is an utterly arcane concept when we look at how historically that’s never really been done to my knowledge. In cases where they went from fiat to commodity there was always some currency to bounce off of in one way or another, this isn’t the case today with the international fiat system the way it is. The whole problem comes in with this question: What would the exchange ratio be? It would also be interesting to see what happened in the short term if it did happens and gold began to be bought up by banks and the like.

Interesting. Do you think that it would be more of a shock to do a sequence of this “gold standard, abolish fed” than this “repeal legal tender, incentivize private currencies, abolish fed”. Obviously getting off the ponzi would be a gigantic and shocking revaluation of the dollar and would throw off our trade balance, then again it might foster good trade relations because we’d be buying up exports. Is it possible that a privately instituted revaluation might have some parachute mechanism? I honestly have no idea what would be the thing to do to get back on the gold standard. Set the dollar at 1 oz of gold? 1/8 oz of gold? I don’t understand the finer points of this area, maybe you do. Anyways I’m pretty sure the banking families RockRoth have an incomprehensible stock of gold, so maybe competing currency would be better in that regard.

Good job on knowing that, people even around here underestimate the true damage done by Hoover with his policies that caused prices to stagnate or be able to adjust at a time when they needed to the most, especially with labor (which in turn helped to lead Keynes to argue that wages were sticky downwards and that the free market couldn’t work). With this being said I honestly believe you’re being extremely optimistic. If we look at the stupidity, hard headedness, and inability to cooperate that’s going on in congress right now, people aren’t willing to compromiste, make hard decisions, or cast away potential votes, they just aren’t. The super committee showed that the “leaders of this country” are prepared to watch it, and the world economy BURN, before doing something that might offer up their seats to the idiotic hordes of the American populace who they claim to serve.

Thanks Bob Murphy ! I have confidence in Paul’s leadership and I think that the power of speech would probably be his most valuable asset. Obviously people won’t get smart enough fast enough to get what’s going on, but maybe if he gave kind of a lecture on Herbert Hoover keeping the price of labor high and increasing the income tax it would help people get what’s going on. Even if he does that I suppose you’re right that the problem isn’t the people so much as the congress, who are IMO at least 40% soldout completely and will reject what is best for recovery.

Probably true. The favorite would be a slow phasing out of government spending which would prevent anything close to a depression (cut 5 percent of the current budget by 5 percent for 16 years or so) but this will not happen. I don’t know how bad the depression would be. This cannot be said a priori, but it would be terrible. I believe strongly it would reach great depression levels, but I do not know how long. If it were all left to the market, and governments around the world did nothing, then I would say it would guess 5 years is what it would take for a healthy recovery. With this said, foreign action, even if domestic action is secured, could be fatal. The actions of state and local governments should not be forgotten either

You have a good point about state’s regulations. That was, after all, why federal regulations were so sought after under TRoos, because Morganites and Rockefellerians feared reactionary measures by the angered states. I think that this is a problem, but also only a situational problem, meaning a short-term problem. If a state desired a robust economy then it would follow the lead of the state with the most pro-market policies rather than the state’s which put maximum price levels on sandwiches or whatever. This is over a long-term however. There would in all probability be a panic for the states to ‘do something’ which as we all know leads nowhere but underground.

Also, do you really think it would be 5 years of great depression style doldrums?