Diagnosing a bubble while it is happening can make you rich–you can short sell the stock!
Why should I believe Mr. Schiff does a “better job” at forecasting bubbles than anyone else? Do you watch Jim Cramer on Mad Money and believe he is accurately predicting market trends? Some people do. I am not convinced.
True but it’s not the task of the Austrian school to show you how to do that.
You shouldn’t. It’s a speculative risk either way. I can’t tell you who to believe and how to invest your money, you’ll have to find that out for yourself. Besides none of that has anything to do with economics, those are business and investment related questions your asking.
No I don’t watch Jim Cramer on Mad Money. I can’t think of a worse way of investing my money(IMHO).
Mises Pieces, first I want to say you have my favorite username on here. The avatar makes it perfect.
Second, I want to direct you to these PPT notes: http://ux1.eiu.edu/~mqdao/303_chapter19.ppt. I think that will even better explain RBC theory.
So far as I know, there is no reliable catalogue of what the exogenous variables were.
So far as I know, there is no reliable catalog of what the exogenous variables were.
by the standards of neoclassical empricism, does this render RBCT a failure thus far?
I am glad you noticed that there are two phrases being used, “fundamental reasons” and “fundamental value”. Let me lay some knowledge on you, and you can sit back contentedly, a chastened but wiser man.
Fundamental value, we agree, is a myth. It is supposedly the “correct” price that “should” be what people should be paying for it.
A fundamental reason for buying an asset is a technical term used by people who make a living investing in stocks. It means a good solid reason to believe that the stock will make money or lose money for its owner. A few simple examples:
If the company has been losing a billion dollars a day for the last ten years, that is a fundamental reason to NOT buy the stock. If, on the other hand, it has been making a billion dollars a day in net profit for the last ten years, that is a fundamental reason to buy the stock.
A non speculative reason to buy a house is to enjoy the rents it will generate. If the expected rent per month is lower than the upkeep and property taxes, that is a fundamental reason NOT to buy the house.
Warren Buffet discovered another fundamental, which has leaked out to the public despite his trying to hide it. If a soft drink has reached such fame and recognition and popularity that anyone selling soft drinks MUST make sure he stocks it, because many people are sure to ask for it [such as Coca Cola], that is a fundamental to buy stock in Coca Cola.
If the management of a company is honest and competent, that is a fundamental reason to buy stock in the company. If they are crooks and fools, that is a fundamental reason NOT to buy the stock.
Now it may happen that the fundamentals all point in the direction of avoiding the asset, and yet people are buying it anyway, in droves. The only explanation for that is that they think the price will go up, for some silly reason or other. They plan to sell it when it goes up. That is when you have a bubble, by definition.
Oh, and in response to another post of yours, I regret that I did not see the link you posted to the Peter Schiff was Wrong video. Would you kindly repost it?
nirgrahamUK, I already stated that I am more agnostic than not toward most business cycle theories, although I think some match the data better than others.
In regard to RBC theory, one would expect output to be strongly correlated to the Solow residual; that is the case, buttressing a belief in the theory.
That still doesnt give you a need for hostility
Smiling Dave, your belief in “fundamental reasons” seems, well, just like adages you think are wise and we should all live by. Is there any actual truth to your “fundamental reasons”? I mean, all you’ve done really is suggest sound investing practices to avoid loss. Big deal.
Consider this: I buy a car, fix it up a bit, and then sell it at a better price. Is that not fundamental? What’s the difference between that and house-flipping?
Or consider this: I buy gold, I expect its price to rise, so I can sell it later. What’s the difference between that and expecting higher prices later for homes?
Boohoo!
haha. i didnt realize how far the thread had gone since I last was here. my “no need” for hostility was in agreement with an earlier post, ironically in defense of you neo, funny that you boohood me for it.
There’s no need for hostility 
Thank you for your concern
one would expect output to be strongly correlated to the Solow residual
the Solow residual is calculated by an equation in which output is a positively correlated input is it not? ceteris parabis is not the solow residual a statistic that increases if total output increases? so what does this tell us?
I did not say I believe or disbelieve in fundamental reasons. I think it funny that someone concluded that I want the world to live by my personal opinions about something.
Let us turn our eyes to the distant past. You asked for a definition of a bubble, and I gave you mine and Bob Murphy’s, which I think are pretty much the same. You said that my definition used words that you did not understand, so I explained them to you. That’s it. No expectations of anyone living by anything.
The difference between house flipping and fixing up the used car is this. There is some economic sense in assuming people will pay more for a car in better shape than in worse shape. House flipping, as done in the recent bubble, did not entail improving the condition of the house. That was NOT why people thought they would make money when they sold it. Rather they believed, foolishly, that “prices always go up” for the EXACT SAME HOUSE IN THE EXACT SAME CONDITION [or worse, because after all houses suffer wear and tear].
About buying gold, expecting it to rise later, and how it differs from expecting higher prices for homes. Mr Neo, you omitted they vital why? Why do you expect gold to rise later? If you have no reason other than a mystical belief that gold will always go up, then indeed, your purchase of gold [if it came after money printing] may indeed be one brick in the wall of a new bubble [to mix metaphors]. If your reason for expecting gold to rise in price is based on solid common sense, then it is not a bubble. I understand that it may be debatable whether your actual reason IS solid common sense. But the principle is valid, nonetheless.
Smiling Dave, once again, Murphy’s use of “fundamental” was no accident; it is directly tied to the notion of fundamental value (essentially, if you want the circularity, “fundamental reasons” should lead to a “fundamental value”). I can even produce evidence that Schiff believes you can calculate fundamental value!
And, like I said, many people expect prices to rise even if a product is in the same exact condition (consider the recent CraigsList trader that eventually scored a Porsche). If I anticipate increasing demand in homes, then this is a sensible position.
I very much doubt people simply have “a mystical belief” that houses will always, forever and ever and ever, go up (nothing ever does); investing over $150,000 (let’s assume) is never done lightly. That much money provides a strong incentive to make reasonable decisions. Just think about times when you’ve made an assertion and then someone says, “Wanna make a real bet?”–typically, your uncertainty becomes more exposed when you have an incentive to more seriously consider your beliefs. Like I continually emphasize, you expect people to become overwhelmed by “animals spirits” during a “bubble” and to make irrational, unfounded decisions. You declare, “Of course I should buy gold! I have great reasons!” but then you dismiss other investors’ decision as being baseless; many people now consider your gold-buying to be baseless and ill-informed, too. Me? Well, I just trust individual decision-makers and I don’t accuse anyone of bouts of irrationality!
This thread has been heading in the wrong direction since the OP. The simple fact of the matter is that the OP asks the wrong question. There is a clear distinction between the Keynesian bubble and the Austrian trade cycle.
To the Keynesians and other (though not all) mainstream macroeconomists, bubbles precede recessions. These bubbles are characterized by such things as irrational exuberance, animal spirits, and expansionary fiscal and/or monetary policy. To these mainstream economists, a bubble is characterized by greater economic growth than would otherwise occur, whereas a recession is characterized by lower economic growth than would otherwise occur
The Austrian economist eschews such words as “bubbles” and “recessions” because they are misleading. The Misesian is not interested in whether or not the boom is characterized by greater economic growth than would normally occur. The Misesian abandons broad economic aggregates and numbers such as “aggregate demand,” “aggregate supply,” and GDP, and instead looks at the underneath currents in the economy which cause instability. To the Misesian, the boom that precedes the bust does not have to be characterized by greater economic growth - in fact, to the Misesian, this is not only unknowable (how could you possibly know what economic growth could have been?) but also irrelevant. The Misesian recognizes that the underlying cause of busts is the change in relative prices and profits that occurs when new money is injected through credit markets.
To expand on the above, the Misesian sees how new money, when injected into the economy through the credit market, causes distortions in the economy which are not captured by “aggregate demand,” “aggregate supply,” GDP, and the “capital stock (k).” When new money enters the economy through the credit market, certain industries which rely heavily on the credit market will become more profitable than they otherwise would be. This is because the new credit provides funding for these industries to expand supply, while at the same time the new credit provides the buyers of these industries’ products with money to demand more of the product. Thus, these credit-reliant industies fare well initially when new credit is injected into the economy, but as the money slowly percolates through the economy, relative prices and profits begin to change in order to reflect consumer preferences. Demand begins to shift away from these credit-reliant industries and towards industries that consumers actually want to buy products from. The only way for a central bank or monetary authority to change such a course of events is to inject exponentially more credit in order to constantly restore the previous distortion in relative prices and profits. Eventually, the central bank will face hyperinflation and a collapsing currency if it follows such a course of action.
Interestingly enough, Milton Friedman empirically verified that there are no bubbles with his “plucking model.” Ironically, the Austrian theory of the business cycle has the best explanation for Friedman’s plucking model. Here is an article by Roger Garrison about ABCT and the plucking model (the URL is http://www.auburn.edu/~garriro/fm1pluck.htm).
^ Because it has become common parlance in economics at this point (EDIT: also note that the modern generation of Austrian economists have been largely taught by mainstream economists, so the terminology of mainstream economics has entered the Austrian school for better or worse). The older generation of Austrian economists (e.g. Mises) never used the term bubble. Nor did he use the term overinvestment, which would have characterized his business cycle theory as one of “greater than normal economic growth” followed by “lower than normal economic growth.”
The fact of the matter is that ABCT, properly understood, has nothing to do with the common conception of “bubbles.” The common conception of a “bubble” is a period of great prosperity. Mises explicitly stated that a boom is, in fact, impovershing, because of how it misallocates resources from some sectors of the economy to others.
In any case, how about you stop working around the edges and actually make a substantial critique? Or is picking at tidbits the best that you can do?
It’s used as a slang term NeoClassical. Krazy Kaju is correct.
Anybody who doubts the existence of bubbles should not be managing their money let alone anybody else’s. Just my two cents.