Great points.
Regards, onebornfree
Very good points, you said what I was trying to say, but far more effectively .
Regards, onebornfree.
This site recommended this book:
http://www.amazon.com/Applied-Value-Investing-Application-Acquisitions/dp/0071628185
I believe it combines the principles from Graham and Dodd’s Security Analysis and applies them to the Austrian Theory of the Business Cycle.
“Shouldn’t Austrians make for better speculators?”
Not necessarily. Austrian economics is great at understanding the past. But there is no real way to know the future, since governments are so unpredictable.
“Not necessarily. Austrian economics is great at understanding the past. But there is no real way to know the future, since governments are so unpredictable.” - Spideynw
That always sounds like a cop out to me, or a lame excuse. If the Austrian Analysis is the correct one then it should lead to some measurable improvement in prediction, even if only a small one or a general trend. If a theory has zero predictive value, it’s useless. Theory has to prove its merit in application, and whether that’s in investing or in policy analysis and advisement, with no measurable impact on the world the critics of Austrianism are not entirely wrong when they characterize Austrians as academics cut off from the real world.
Austrian economics is indeed a science of what does happen when certain courses of action are taken. However, it is not a theory of psychology, individual or group, and it cannot predict if people will even follow its advice.
“If a theory has zero predictive value, it’s useless.” -xahrx
I never said it has zero predictive value. Austrian economics can predict with 100% certainty that increasing the supply of money will increase prices. What Austrian economics cannot predict, and neither can any other theory that I know of, is whether or not a government will increase the supply of money. Do you know of a theory that can predict if a government will increase the money supply? If not, does that mean you think all theories are useless? If so, do you study economics? If so, why, if they are all useless for you?
Government actions might seem somewhat unpredictable, however, for myself at least, they are far more predictable [i.e more government, more regulation, more taxes, more war, more control, more territory etc etc.] than markets and the actions of individuals that comprise them, in general .
However, from where I stand, the way that markets eventually react to more government, more regulation, more taxes, more war, more control, more territory etc , also seems to be somewhat more predictable as well ,in general, but outside of that general exception, individual actions and subsequent market movements appear to be [ and must be, according to the ideas of Austrian methodological individualism] , unpredictable and unknowable in advance.
Regards, onebornfree.
Austrian therory would make for a great, great tool for a speculator in an unhampered market economy, where things actually make sense.
But, as many people have pointed out so far, expecting the decidedly hampered markets we live in to make sense is a recipie for suicide.
Take the auto industry. It would have made a lot of sense for a speculator to bet that, in the wake of the credit crunch, a lot of people would do what they could to minimize their expenditures on automobiles and gasoline, i.e that demand for used, fuel-efficient cars would go up. People would forego the luxury of owning a brand new automobile in favor of cutting costs and paying off debt. So short the automakers and go long on second-hand car dealerships, or some play like that.
Now enter Cash For Clunkers. Now the incentives have been distorted so that your play is going to lose a lot of money - people that are acting very much rationally will take advantage of the subsidization of brand new fuel-efficient autos, and you get taken to the cleaners.
Cash For Clunkers was a political decision, an interventionist decision, and economic theory cannot predict whether such decision will or will not be made, or what form the intervention will take.
This is why a firm grasp of day-to-day politics and personal relationships in Washington, on Wall Street etc. probably serves a speculator better than economic theory in the short term. In the long term, the fundamentals will always reassert themselves, which is why there is such an affinity between AE and long-term, value investing of the type that Faber, Rogers and Schiff practice.
" Austrian economics can predict with 100% certainty that increasing the supply of money will increase prices. "
That is a common misunderstanding about Austrian economic theory, I believe, at least where LVM himself is concerned.
It would be more correct to say that LVM said increasing the money supply might increase the general price level [i.e cause price inflation].
LVM points out [see “the Theory of Money and Credit”], that the final value [purchasing power] of a unit of currency at any point in time is, as with everything else, always the final outcome of the interactions of 2 factors- the supply of money, and the demand for it, not just supply alone.
Since demand cannot be reliably predicted , the final result of the interplay of the two factors [i.e the final purchasing power of the money unit] , cannot be reliably predicted either .
Inflation [ lowering of per unit purchasing power] might be the result, but it might not- it is impossible to know in advance.
For example : the money supply increases at a rate of 10% per year, but the demand for money increases at a faster rate [exceeding new supply], for whatever reason], at the same time.
In that hypothetical situation , because of increased demand [above available supply] , and despite the increased supply, the value [purchasing power] of each currency unit would be actually increased, [ie a deflationary scenario would result], not decreased [ an inflationary scenario].
"Do you know of a theory that can predict if a government will increase the money supply? "
I understand that your question was not addressed to me- so apologies for interjecting here, but I could not help but comment. So I would have to say “yes, I do” - it’s called " onebornfree’s general theory of government" , meaning that as with monetary inflation, although nothing in the end is wholly predictable, the percentages appear to be on the side of someone who pretty much assumes that the government will nearly always increase the money supply - it is practically a natural law- at least as far as I can see.
But that does not mean that inflation will always result. Inflation [i.e. loss of purchase power ], is always the outcome of the interplay of two factors: supply of money and demand for that supply, not just supply alone.
At least, that’s my “take”, and, I believe, LVM’s too.
Regards, onebornfree
“LVM points out [see “the Theory of Money and Credit”], that the final value [purchasing power] of a unit of currency at any point in time is, as with everything else, always the final outcome of the interactions of 2 factors- the supply of money, and the demand for it, not just supply alone.” -onebornfree
Fine, given demand for the currency remains constant, Austrians can predict with certainty that if the government increases the supply of the currency, prices will increase.
""Do you know of a theory that can predict if a government will increase the money supply? "
I understand that your question was not addressed to me- so apologies for interjecting here, but I could not help but comment. So I would have to say “yes, I do” - it’s called " onebornfree’s general theory of government" , meaning that as with monetary inflation, although nothing in the end is wholly predictable, the percentages appear to be on the side of someone who pretty much assumes that the government will nearly always increase the money supply - it is practically a natural law- at least as far as I can see." -onebornfree
No it is not. Past experience is very unreliable at predicting future performance.
“Fine, given demand for the currency remains constant, Austrians can predict with certainty that if the government increases the supply of the currency, prices will increase.”
True, but it seems you missed my [badly made] point- demand cannot be predicted; government only controls one side of the equation- the supply side.
“Past experience is very unreliable at predicting future performance.”
Yes, I agree, and in my defense I never said that it could never happen- I only observed that percentages appear to be on the side of the person[s] who assume that the government will nearly always increase the money supply [given the fundamental nature of all governments].
Just a wild guess here, and no offense intended, but it appears you have a little more faith in governments than I do [to do “the right” thing], although, conversely, it can be argued that I have a lot more faith than you in the government doing what it nearly always does- continually increasing the money supply.
And here we are.
Regards, onebornfree.
“True, but it seems you missed my [badly made] point- demand cannot be predicted; government only controls one side of the equation- the supply side.” -onebornfree
Actually, the government can quasi control demand as well. For example, in the U.S., the government has pretty much made FRNs the only legal currency. Granted, people do still barter, but it is on a very limited scale. Some few use silver and gold too, but again, on a very small scale. I would guess this is what happened in Germany, otherwise, why would people have kept using worthless pieces of paper?
"Just a wild guess here, and no offense intended, but it appears you have a little more faith in governments than I do [to do “the right” thing], although, conversely, it can be argued that I have a lot more faith than you in the government doing what it nearly always does- continually increasing the money supply. " -onebornfree
I don’t know why you think not increasing the money supply is the “right” thing. The right thing would be for government to quit taxing people. And I am 99.99% sure that is not going to happen anytime soon.
Regardless, neither Austrian economics, nor any other economics, can predict what new stupid rules governments will come up with. That is my main point. Who can know what the next industry is that the government will favor or punish? Who could have predicted the government would outlaw fluorescent light bulbs or 5 gallon toilets? Who could have predicted the government would bail out big banks ten years ago, let alone a year before it did? Who could have predicted the Fed would lower the discount rate to 0%? The answer to all of these questions, is that no one could have. No one knows the future, and there are no theories that can predict the future.
A good quote from our not-so-popular figure:
"Markets can remain irrational a lot longer than you and I can remain solvent." - John Maynard Keynes
I don’t follow markets too much but I tuned in to see what would happen after this Greece thing and it seems like a pretty bad day
Edit: never mind. It was crazy though HUGE crazy swings in the matter of minutes. Looked like the market was in free fall for a little bit though.
The spike down seemed to be computer trading programs hitting their price floors and dumping, according to the rumor. My floor was s&p 1146, but since I monitor my stocks I didn’t sell any. Its at a key decision point right now though, either its a good time to buy or hte worst time.
I picked a good day (yesterday) to load up on leveraged silver ETF’s!!! Holy crap.
Anyway, the market isn’t doing as bad as people are making out, because the dollar is rallying. The price changes in the stock market logically precede changes in prices of consumer goods, but in terms of real purchasing power, I don’t think stocks have really fallen too much.
I do believe they SHOULD fall.