http://www.youtube.com/watch?v=ZtVVmsr1HLY
What do you guys think? My economic knowledge is severely lacking (relative to the other users on this forum!), so I don’t have the credentials to tackle this.
Mises is not the founder.
He makes a lot of assumptions when he says that people are comfortable expecting their money to lose value annually. It miht have more to do with them not cairng because of deposit insurance and minimum wage laws…who knows.
He is also jumping to the exetreme result of credit expansion. (Hyperinflation) is an extreme. a straw man. There is a difference between “inflation” and HYPER inflation.
Reserves get raised in other countries. as a way of curtailing credit, but not having to hike interest rates.
The theories of the austrians are, “some correct a lot of the time.”
Central banks don’t shut down because they operate under color of law and can create credit. He ignores moral hazard and waste that helps to build which is the problem that investors runs into that causes malinvestment. Central banks are the entithesis of economic logic, they are cartelization hubs.
Austrians say that credit cycles occur because interest rates distort the term structure of savings and therefore maturity rates and therefore investment patterns and therefore labor and wage patters and therefore consumption patterns.
Contractions are needed because excess credit beyond physical production distorts the financing signals and they will eventually come out of alignment with the average production time. through maturity mismatching and FRB credit expansion
Straw men and relying on uncertainty and expectations. Then he accuses Austrians of ignoring empircal evidence while he focuses only on psychological things like uncertanity and expectaions. Those are basically weakness for entrepreneurs to strive for that causes competition, right?
His first refutation compares aplles to oranges - Mises says people will spend their money on anything when the value of the money decreases by 3/4 in a week but people don’t spend all of their money because they could care less if it is worth much less in 60 years. 1 week = 60 years? Ergo Mises had it wrong.
Quit watching after that nonsensical leap … lol
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It’s not a choice between inflation [not hyperinflation] or recession. Both happen together, because both spring from the same cause. Printing money causes inflation. It also causes booms[=wasting of resources], which cause busts. In fact, this is the basic mistake that he makes over and over.
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For hyperinflation you need vast amounts of money printed, otherwise you merely get inflation and recession. Like we have now.
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His silly argument against hyperinflation is ignoring differences in quantity. It’s like people being warned to leave their homes becasue a tsunami is coming that will wash their homes away into the sea. They pooh pooh it by saying they let water into their house every day when they take showers and baths, and it just runs down the drain, doing no harm. Hyperinflation happens when a tsunami of money is printed. He pooh poohs it by saying that smaller amounts are printed all the time and there is inflation, but nothing like the panic Mises describes. I lived in a country that had high inflation, and Mises described events there prophetically.
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He errs when he says that a recession begins when we stop expanding credit. That’s Milton Freidman’s and Ben Bernanke’s view, not the Austrian view. Which is why Bernanke thinks printing money forever is a great idea. the Austrian view is that recession begin when the Rude Awakening happens, which we will discuss later in point 7.
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He errs when he writes that a reallocation of resources must take place to avoid hyperinflation. Whether there is hyperinflation or not depends on one thing, will there be a tsunami of money and credit created. The Mises quote is addressing a different problem, wasted resources. Once resources are wasted, you have to do two things. Stop wasting them further, and also start accumulating new resources by underconsumption. Indeed, one incentive to encourage underconsumption is by promising higher interest rates to depositors, to encourage them to save their money, not spend it. If there is hyperinflation, of course people will save nothing.
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In the section titled Theory versus Fact, he argues that money printing has to stop and fractional reserve banking has to end in order for resources to be reallocated. Of course that would help greatly. But the resources have to stop being allocated to wasteful projects eventually regardless of the interest rate, because the Rude Awakening occurs [see point 7]. Which is what is happening before our very eyes. There is a 9% unemployment rate, according to govt figures. In reality it is about double that. Why did these people lose their jobs? It is a resource, labor, being reallocated. Sadly, there are reasons preventing these unfortunate people from being allocated to the right places. But that they are being ejected from the wasteful places is undeniable; they are unemployed.
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Maybe his argument is that since money printing and low interest rates and FRB cause misallocation of resources, then as long as the money printing goes on, the misallocation must go on. Thus, the stage where there is a reallocation will never happen, meaning we should never have a recession. The only way we can have a recession according to Austrians, he thinks, is if the printing stops and the interest rates rise and FRB ends.
But this is a mistake.There is a mighty force he has ignored completely because he doesn’t understand it. We can call it The Rude Awakening. In short, a person will waste his money only so long as he thinks there will be profits in the future. When the future finally comes, and there are no profits, he experiences the Rude Awakening. He realizes that he has wasted his money, and that of course there is no point in wasting more. So no matter how low the interest rates etc, he won’t waste more money on that scheme which is now revealed as unprofitable.
We see this before our very eyes. People wasted resources in housing, thinking that in the future they will make big money. When the future came and there was no profit, they stopped wasting their money on housing. Which is of course why Obama is making a big mistake trying to “prop up” the housing market. It’s too late. The Rude Awakening has occurred.
- He asserts that we never see interest rates at their natural levels during a recession. How does he know what the natural rate is, that he declares we never reach it?
Enough. He shows over and over that he has no idea what the Austrian theory is.
The assertion that ‘100% reserve requirements are necessary in order for the interest rate to accurately represent society’s true desire to save’ is simply false, though it would be true if there wasn’t a demand for money. Additionally, 100% reserve ratios have existed, namely in 14th century middle east (due to Islamic decree), though I don’t understand the argument he’s trying to make. It’s like the argument: “free markets have never existed, thus those who support free markets are wrong.”
Either way, this is another so-called “refutation of AE” that is wrong right from the get-go.
Smiling Dave enumerated most of the problems I’ve found. I would add a couple of issues - first, interest rate (as any price) is determined not by demand or supply unilaterally, but by their interplay. Second, money is NOT resources - the Fed may keep printing money, but this does not mean increasing available resources (in fact, this will diminish them by misallocation).
This is incorrect/inconsistent with Austrian theory.
The recession occurs when there is a higher demand for consumer goods relative to producer goods (increased aggregate demand) which is not met by a corresponding expansion in the supply of money to a sufficient degree. In other words, the recession (correction) does indeed occur when the market rate of interest rises towards the natural rate. This, in fact, is the signal that tells entrepreneurs that their investments are malinvestmnets, and what causes the profitability of such malinvestments to crash. The “awakening moment” (this ideas is actually rather similar to the so-called “Minsky moment”) occurs precisely because the market rate of interest rises towards the natural rate; it does not occur before then; production is guided by prices and not intuition.
Additionally, inflation does not destroy profit; it merely arbitrarily alters what is profitable and what is not, and alters the degree of profitability amongst varying ventures (in the “short run”).
In other words, the recession (correction) does indeed occur when the market rate of interest rises towards the natural rate.
So if interest rates are kept low forever there will never be a recession, is what you are saying. How do you explain the one we are in right now?
The recession occurs when there is a higher demand for consumer goods relative to producer goods (increased aggregate demand) which is not met by a corresponding expansion in the supply of money to a sufficient degree.
I don’t get this. Here too, you seem to be saying that print enough money and there will never be a recession. Esuric, that just ain’t so. If the problem that causes a recession is malinvestments, meaning resources wasted, how can printing money bring those resources back? As a concrete example, how can printing money save the supermarket in the next paragraph, especially if we assume it built in, say, Antartica?
production is guided by prices and not intuition.
Brother Esuric, do you see anything about intuition in the words “When the future finally comes, and there are no profits”?
I shall explain. There is a concept known as “investment”. It means you take your money and don’t spend it on cocaine today, but instead plough the money into something you cannot snort in your nose, say to build a supermarket. You do this because you think that people will come in droves [in the future] when the supermarket is built and you are selling your wares. You think that so many people will come that there will be so much profit that you will get all your invested money back, and then some.
OK, you build the supermarket. You hire stockboys and cashiers, you stock the shelves, you advertise. But nobody shows up. Undaunted, you keep at it, advertising month after month and paying your workers. But this does not go on forever. At some point you get the Rude Awakening. You realize that you gambled incorrectly. Not from some seat of the pants intuition, but from looking at the books, you deduce that you have a lemon on your hands.
So you fire everyone, sell the stock at a loss to someone, and the real estate as well. Enter the recession.
The fellow in the video did not really explain anything except what happens in the limit as credit expansion becomes so great and money loses its value so rapidly that people go into a “Crack Up Boom”. As for credit expansion booms causing their inevitable busts, Mises describes the situation in the Great Depression where there was a massive bust caused by credit expansion in the 1920s without large increases in prices.
The real point that the author does addresses but grossly understates the effects of is is that credit expansion booms have in them distortions in the productive structure of the economy. And without central banking induced hyperinflation, these distortions will become clear as consumers reallign their preferences. Look at the housing bust, saying that credit defaults caused the problem is only partially true as the central bank can simply create more money and pay off the loans for creditors. The real issue here was that lots of scarce resources were devoted to the housing business in the early 2000s. With easy credit there was a boom, but eventually consumers tired of paying increased prices for homes. When prices began to fall, home owners found themselves holding mortgages with values greater than the homes they were in so they simply defaulted.
He seems to be conflating money with resources, for example when he critiques the introduction to Gene Callahan’s book; he says that the “increasing money supply/lower interest rates sending false signals to entrepreneurs, distorting the production structure” view of the business cycle is wrong because, “resources follow money, not theoretical voluntary preferences. Because of this, as long as money is being artificially sent that way (via FRB and central banks), there will indeed be resources to invest.”
Money per se is only a proxy for real resources. If you don’t understand the distortion of the signals for real resources that occurs as a result of this monetary expansion, then you cannot possibly understand what the ABCT is saying. In fact, it seems to me that he’s cramming the Austrian Theory back into a monetarist understanding, especially when he says that it’s the contraction that triggers the bust, and thus it’s the rightful job of a central bank to continue the modest, stable expansion of the money supply (“pragmatically forever!”).
The seemingly stimulative effects of inflation suffer from diminishing marginal returns. In other words, in order to prevent the recession, you need a gradual and progressive (exponential) expansion in the supply of money. Because of this, inflation can only delay the necessary correction for so long. You reach a point where you must engage in extreme monetary expansion in order to prevent the market rate of interest from rising towards the natural rate. If the government attempts to do this, namely continue printing at exponential rates in an attempt to forever prevent the necessary correction, hyper-inflation will inevitably occur.
So no, the government cannot indefinitely delay recessions.
spawktalk is a waste of time, he doesn’t want a real debate.
I cornered him on his assertion that resources follow money. I told him that doesn’t work, Weimar and Zimbabwe already tried that…
Long story short, I made him look bad with his own Wikipedia citations, So he deleted our conversation and added me to his blocklist.
Spawktalk is a former anti-statist and he’s simply lashing out at libertarians and the Austrian school much like a religious convert will attack their old belief system. He’s not interested in debate or truth, he’s just propagandizing for his new position.
i like your tag line: atheist malthusian economist. did you come up with that or is it quote from elsewhere?
Spawk probably just got bored with Austrianism. Plus he had some falling out with Fringeelements and the two hate each other now for some reason.
" Mises is not the founder."
Do you hav a source for this? Roger Garrsion claims that mises was the first to posit the theory , and that he did so in his 1912 book “The Theory of Money and credit”.
http://www.auburn.edu/~garriro/a1abc.htm
“He makes a lot of assumptions when he says that people are comfortable expecting their money to lose value annually. It miht have more to do with them not cairng because of deposit insurance and minimum wage laws…who knows.”
I don’t think that is a big assumption. Do you think that msot people are worried about what the price level will be 60 years from now? However, you are correct in saying that deposit insurance has played a role in stopping hyper inflation. My explanation was not meant to be all encompassing. "
“He is also jumping to the exetreme result of credit expansion. (Hyperinflation) is an extreme. a straw man. There is a difference between “inflation” and HYPER inflation.”
Oh, I agree, that is an extreme jump. However, is was not I who made it. I qouted Ludwig Von Mises as saying that the if people realized that inflation was going on, and would conitnue, then hyperinflation would insue. That was his jump, not mine.
I’m not sure what the next two sentences you posted are supposed to mean.
Moral hazard was brought up because it it wasn’t brought up in either of the arguements for the ATBC that I was responding to. I, as most, do accept that expansions of credit up the rick of moral hazard.
Could you explain what credit beyond physical production means?
Your last group of setences is confusing. Do you think that psychological “things” are not empirical? Do you deny that many Austrians explicitly reject an emirical methodlogy? And how would competettion weed out any of the problems I mentioned?
@ bbnet
No, you misunderstood what I said. Mises didn’t say anything about 3/4 weeks. That was my own example to demonstrate that was mises was talking about could happened in some situations. Mises said that it would happened when ever people realized inflation would conitnue. I hope that clears this up for you.
@Smilling Dave
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Firstly, the msies essay I derived my qoute from, “The Austrain Theory of the Trade Cycle”, makes it very clear that he thought that hyper inflation would happen if a reallocative recession did not. To say both happen together, as an arguement against me, is fallacious. I was talking aobut hyper inflation. I am well aware of the austrian view that as resrouces flow into lower order goods during a recession inflation can occur. Please, explain why resources that are spent due to an expansion in credit not backed by savings are wasted.
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Okay, tell Von Mises that, not me.
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Again, like the comment before you, are are argueing against hte Von Mises qoute, not me.
4.Firstly, that is not freidman or bernankes view. They both except that there exists a multiplicity of causes of recession. One cause, a common one, according to them, is a contraction in the money supply. Secondly, austrians agree with them on this. They disagree, however, with the causes of the contraction. For a very simple discussion of this I suggest pages 64-66 of Robert Murphys (an austrian economist) book on the depression.
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Mises’s notion of wasted resources is contingent on his view that the boom is unsustainable, which is contingent on his view on hyperinflation.
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Why, if the low interest rates are sustainble, are the investments necessaily wasteful?
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As long as low interest rates are maintained, why will there be no profits?
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I know this because the natrual rates are defined as the rates that would prevail if the supply of money to lend was detemrined entirely by voluntary savings. Thus, frac. banking would have to end, and the central bank would have to stop inflating. But, does not happen.
@ Esyric
Please, explain why the existence of a demand curve for money makes my arguement invalid. Anyhow, I was talking about recessions in capitalistic economies, and so I don’t think your example applies. And no, that is a complete strawman, I never said anything like your caricature of my arguement. You were correct when you stated that you did not understand it.
@Andris Birkmanis
Yes, I did forget to mention demand for money. That was my mistake. Of course, I did not mean to imply that by expaing the money supply we could expand resources forever. What I meant to imply was that by moderatily increasing the money supply we could have stable inflation. As long as we don’t move the AD curve faster than the AS curve as are fine. No?