Domino effect of failing banks, role of inflation, and critique of Austrian economics

[John_James]

@FlyingAxe

A cousin of my wife is an investor (his political beliefs are moderately conservative). I’ve been having a discussion with him about Austrian economics and the current events. He is clearly not an Austrian, and although I read articles on Mises.org, I am a biologist, and he is an investor, so he clearly knows more than I do. I was interested what people might say to some of his arguments (not so that I can rebuke him, but so that I understand more clearly why he is wrong).

I am quoting from his latest reply:…

I have to admit, it was a total chore to read his nonsense, but I think it will be useful to have proper responses here.

The money supply needs to increase along with the growth rate of the economy to get zero inflation.

Mmmkay. And my cat’s breath smells like cat food. So?

That way, there are more dollars out there when the total value of goods and services goes up. [In the previous e-mail, he claimed that while excessive inflation if clearly bad, some level of inflation needs to happen. So, once the government establishes that “healthy” level of inflation, things will be hunky-dory.]

Who says we need prices to stay exactly the same? And what the hell makes him think a handful of people in an expensive room in Washington can micromanage an economy of 300 million people? Is he still under the impression that central planning works? Did he miss the day they taught history in history class?

I agree that going off the gold standard caused much of the hyperinflation of the '70s. Since that was brought under control, inflation has been relatively tame.

You mean since the way inflation is officially measured has been changed, official measurements of inflation have been relatively tame…right?

It was the transition to fiat currency that caused the hyperinflation, not being on it.

First of all, that’s like saying “it was setting the house on fire that caused it to burn…not the house being on fire.”

Second, what hyperinflation? When? What is he talking about?

Yes, the economy grew in the 19th century, but it was a tiny fraction of the growth we have had in the last 30 years!

Source? Where is he getting this from? How is he defining “growth”? And more importantly, how is he measuring it? Did he just make this up and is expecting it to be true?

Lack of inflation doesn’t lead to no growth, it leads to very slow growth.

Source?

2. It’s just not true that most booms and busts are caused by monetary policy- throughout history there have been booms and busts, caused by various factors, including environmental, mercantile, emotional, etc.

Emotional booms and busts? Is he serious? Is he trying to sound knowledgeable by just throwing out words? Honestly he sounds like the pony. “Emotional booms and busts.” Give me a fucking break.

Didn’t everyone already try that one on the current crisis? Wasn’t I told that “greed” was the culprit? Kind of like the time I was told “gravity” was the reason the plane crashed?

The great depression was before fiat currency

I guess it’s clear being an “investor” doesn’t qualify you as a historian. (Read: he needs to go back to class)

as was tulip mania in The Netherlands

No one said anything about fiat currency being necessary for bubbles to occur. It’s about increases in the supply of money.

countless famines, and hundreds of other crises of tremendous severity.

Name the ones you’re thinking of and I’ll help you understand their origins.

Mistakes managing interest rates can cause booms and busts, but not managing at all practically guarantees them, and ones of much greater severity.

I suppose he’s under the impression the things he listed prior to this sentence serve as supporting examples of this ridiculous claim, but in fact they don’t. I provided two separate links to excellent resources regarding the only two specific crises he named, and if he would be so kind as to offer examples of any others, I could do the same for those.

3.The national housing crisis is over already, so it’s not possible for it to continue.

I’d really hate to see this “investor’s” portfolio.

Housing prices in much of the country have already begun to come up.

Right. And I’m sure those are perfectly reasonable, market prices…not at all inflated or propped up, or in any way affected by the tax credits, tax deductions, guaranteed loans, and any of the 18+ programs designed to artificially influence consumer behavior in the housing market…let alone the trillions in new money the Fed continues to create out of thin air.

The exceptions are places with unusually large numbers of forclosures, where it will be awhile before those can be worked through.

Oh. So you mean the down market will continue. That’s funny cuz two sentences ago I could have sworn you told me it was impossible for it to continue. Must have been my imagination.

Those areas will hinder growth somewhat in the near term, but will not have a huge impact.

Just like the crisis was “contained” in the subprime market and wouldn’t “spill over” into prime mortgages? Just like we wouldn’t see an overall dip in housing across the country because “housing is local?” Has he been listening to this guy again?

Many of those numbers cited were just the federal government giving a large enough backstop to banks and others so that the market would not question their ability to pay- those huge amounts never changed hands and never will. They could have doubled those numbers yet again and it would have zero impact.

What “numbers”? What the hell is he talking about?

If students of the Austrian school had made all of those decisions in 2009 [to let the banks fail, etc.], we would be in a depression right now, because there would have been a domino effect among failing institutions, most large companies would be wiped out (including ones that were never in any danger under the scenario that actually took place), the unemployment rate would be about 10% higher, and the US government’s balance sheet would actually be worse (because the depression would reduce tax receipts by much more than they “spent” on the bailouts and stimuli.

…and of course he has proof of all that.

I’m quite interested how he’s concluding that scenario…and even more interested where this 20% unemployment rate is coming from. Certainly not the government’s figures. They said without the recovery plan unemployment would peak at 9%. As we all know, unemployment was well above that (even earlier than their time tables).

I don’t even have to provide any counter evidence (even though I could), because he hasn’t provided any of his own. He’s given no support for anything he’s said so far…just the same scare stories Congress gave while they were trying to pass a bill while trying to claim there wasn’t even time to read it.

We wouldn’t be falling as long because we would have hit rock bottom too quickly. The economy might have begun rising more quickly (though I’m not convinced), but still would be way behind where it is now, and probably would be for another 5 years, because it would have fallen so far.

I don’t get it. It sounds like he just admitted we have farther to fall. Wasn’t his whole premise that we are already out of the woods and growing again?

This guy is incredibly confused. Send him a copy of Meltdown or Crash Proof or Financial Fiasco. Also for more info you might check the links here and here.