Sunday, September 20, 2015

A Second Look at So Called Austrians

My post, The Absurd Idea That the Fed is Not Going to Raise Rates, has generated quite a bit of attention and comment. In this post, I want to respond to many of the comments to the post.

First there were a number of commenters along this line:


Anonymous:

Why are they "so-called Austrians" instead of just "Austrians."

Is the fact that they disagree with you on a prediction - what Austrians point out as mostly impossible - make them less Austrian somehow?

Is it that you are angry that your prediction of raised rates were wrong that now you must save face against those who called you out on it?

Don't be petty, Bob.

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V

I'm Really confused by this article. I want to know names. Who are you talking about? Mr and Mrs Strawman?

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Anonymous:

No links to the alleged claims austrians are making.

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sonepatchworth

I surmise this is a thinly-disguised attack on Schiff's positions. Just name him for goodness sake. The clashing of opinions among Austrians who share fundamental views is informative, healthy, and welcome. Have Schiff respond in friendly debate.

My response:
This was not a disguised attack against Peter Schiff. I don't really follow him, so unless he is making some kind of major news. I don't know what his views are. The one post I did on him was done becasue his comments were brought to my attention by Chris Rossini. I  have no need to launch a "disguised" attack on Peter. When I want to just address a point made by Peter, I do so. The post under discussion was much larger than a focus on Peter. In the post prompted by Rossini, I commented on Peter directly.
In my recent post, I was writing in response to many people who seem to think they are viewing things from an Austrian perspective. Peter might fall into this category in some cases, but as I say, I don't follow him close enough to know how often. I will say that if he thinks that the Fed must absolutely launch a new QE soon, he is off the mark. As I said in the initial post, QE is just a subset of open market operations. Any sound Austrian economist understands this. If you think that there is something special about QE in "saving" the economy, you are not an Austrian. I hasten to add QE can boost a specific asset set, but this has nothing to do with boosting the overall economy. I quote Murray Rothbard again.
In his 1983 book, The Mystery of Banking, Rothbard made this clear (italic in original)
From, the point of view of the money supply it doesn't make any difference what asset the Fed buys... 
So point 1, if you think there is something special about QE in saving the overall economy, you are not a sound Austrian. Indeed, you don't even have a rudimentary Krugman understanding of the economy, where he gets this econ 101 stuff correct, as I noted in the initial post.
As for those of you arguing that I created a strawman and you want to know names, not identifying someone is not creating a strawman.  A strawman is about distorting an argument so that it can easily be knocked down without getting to the essence of the point,

As I will show in the rest of this post, there are many, as evidenced by comments to the initial post, that hold the views that I tried to knockdown in the post.
As for my being "petty," for pointing out what I see as errors in the thinking of others, well that's what I do at EPJ all day long. I particularly believe that those who think they hold Austrian positions when they don't have a clue are particularly dangerous. So always expect attacks on them,.If you don't think I go after everyone and anyone that I think holds an incorrect view, then you must be mistaking me with Greg Mankiw. EPJ and Target Liberty are in your face places. If I go after people without justification, you could have a point, But sloppiness on Austrian school thinking needs to be smashed and smashed again, with logic and no holds barred.
And in general. I don't hold back. There have been some Austrians who have been very kind to me, but I am not afraid to call them out on points I disagree with them on. There are others I don't agree with on some points and don't know me very well but I have objected to some of their thinking, still in brief encounters personal encounters with them they have been exceptionally nice to me, but I continue to call them out when  the conversation moves on topics where I see them as wrong.
This is a smash and be smashed economics joint. It will continue to be so.

Let's move on. Some other comments.

Comment froms Donxon

Why is it metaphysically impossible for the Fed to never raise rates again?

My response:

Reading comprehension problem? That's not what I wrote.
 Comment from Brandon Foreman
Note that every recession is kicked off with a spike in the CPI, which coincides with a sell off in the most liquid assets, like stocks and bonds:
 My response:
This is a perfect example of someone who thinks he is an Austrian. But his statement is completely incorrect from an Austrian perspective.
Rothbard writes in America's Great Depression:
"The fact that general prices were more or less stable during the 1920s told most economists that there was no [monetary] inflation threat, and therefore the events of the great depression caught them completely unaware."
It is very possible to have a bust in the economy without a spike in the CPI.
Further, the commenter is using empirical justification for his theory, which is an outrage in the eyes of sound Austrians. 

Annonymous quotes Janet Yellen and Jeff Berwick makes the same point:

Ep. 110: Yellen Admits Rates Could Stay at Zero Forever
https://www.youtube.com/watch?v=gi1v8AvZY4k#t=9m24s
Published on Sep 17, 2015

"And of course, since I believe the Fed is never going to raise rates, and since Yellen admitted to the possibility that they may be at zero forever, well, if the Fed is not going to start shrinking its balance sheet until after it starts raising rates, and it's never going to raise rates, well it's never going to shrink its balance sheet.

"And again, when I say the Fed is never going to raise rates, I'm talking about on its own volition: because the Fed wants to. I know that, eventually, they're going to have to.

"See, that is a difference between me and Yellen, or something that Yellen doesn't understand. I know that at some point the Fed is going to lose control of this process, and they're going to have to raise rates. And then it's going to be a complete catastrophe. It's going to be much worse.

"The crisis that the Fed is trying to avoid by keeping rates at zero is going to be much bigger when it's ultimately forced to raise them from zero. And, of course, it's going to have to raise them much higher because it waited so much longer.

"And if you thought the 2008 financial crisis was bad, hey, that was the proverbial Sunday School picnic, compared to what's in store for us, now."

Here's Berwick:

Janet Yellen was asked if the Federal Reserve might keep interest rates at 0% forever. She responded, “I can’t completely rule it out but really that’s an extreme downside risk that in no way is near the center of my outlook.” So, even Yellen isn't ruling it out. But you are?
My response:
There are a couple of confusions here.There is a failure in the comments above to understand how Federal Reserve chairs tend to answer questions. They tend to not rule anything out becasue they just don't want to be boxed in it at all. If you ask Yellen, if the Fed is thinking of using chickens to shit out dollar bills to boost the economy, her likely response would be that the Fed hasn't had discussion on the topic but the Fed would require further study before launching such a money printing program, but she would not rule out chicken shit.
So to the degree Anonymous and Berwick think that Yellen has signaled some kind of strong policy possibility with her response to a negative interest rate question, they are way off.
But, further, from an Austrian perspective there can not be negative interest rates. Where rates have gone marginally negative. it is not becasue people have suddenly decided that they are willing to pay to loan their money out, it is possibly a fee for safe keeping of funds and transnational convenience or possibly a tax, as Walter Block has pointed out:
A basic principle of Austrian economics is that the originary rate of interest (the rate of discount of future goods compared to present, otherwise identical, goods) can never be negative. The reason for this arises not because capital is productive, nor out of man's psychology. Nvertheless, in spite of the foregoing, there are many benighted souls who insist upon the possibility of a negative rate of originary interest. They are continually discovering cases which "prove" their conclusion. The number of such examples has reached such proportions that it seems advisable to take account of them in a systematic way. Accordingly, this paper is devoted to classifying them in a manner that makes the most intuitive sense: in accordance with the economic errors which are necessarily committed in their very statements.
To think you can have negative interest rates is a failure to understand a key principle of Austrian economics.
  Writes Wags:
I maintain that the bubble is over 50 years in the making. An Austrian Credit Cycle is enormous. When have we had a real correction since 1929?
My response:
Wags is a regular commenter here and he makes very sound comments. Indeed, he has caused me to think about topics more than once based on his observations in the comments. but he has made this comment several times about the last real correction being in 1929. I see things differently.
First. I am not sure why WAGS singles out 1929, but I suspect that he does so because of its length. But the length of the Great Depression was not because of some kind of super cleansing of the business cycle but rather because of interventions that were placed on the economy which prevented the business cycle from a short, full liquidation. Both Rothbard and Robert Higgs have made this Austrian point in their works.
Austrian school business cycle theory is about distortions in the consumption-capital structure of the economy caused by central bank manipulations of the money supply. Thus, when we see periods of liquidations in the capital goods sector following a slow down in money supply growth, this is what would be classified as a bust in the business cycle, by ABCT, of which there have been many since 1929.

Writes Josiah:
Lol, I agree, a few days back Wenzel downplayed the Catholic Church's great writers such as Aquinas. he should become aware of Aquinas' belief that you make your opponent's strongest argument.
 My response::
Reading comprehension problem? When did I ever downplay the Catholic Church's great writers such as Aquinas?
 Writes Josiah:
Clearly market action scared the Fed, Wenzel downplayed this possibility.
My response:
Where is there evidence I downplayed this possibility? There is no such evidence. You are making this up. I may have not discussed the topic at EPJ, but I did touch on it in the EPJ Daily Alert regularly. For example, on September 15, I wrote in the ALERT:
 As I have pointed out before, the key last box that had to be checked off for the Fed was an unemployment number at or below 5.2%. That box was checked off earlier this month when the Labor Department announced an August unemployment rate of 5.1%.
The only thing really preventing the Fed from hiking after that number, based on their own decision points, is cold feet. especially in the shadow of the recent mini-crash in China.
I wrote this in the ALERT on August 31 before the Chinese mini-crash:
 Unless we have major volatility or a stock market crash (and I continue to believe this is a possibility, given recent money supply slowed growth), a rate hike is extremely likely if the August unemployment rate, which will be released by the Bureau of Labor Statistics this Friday, comes in at 5.2% or lower, (Last month it came in at 5.3%)
Rather than downplaying market action, it is the MAJOR reason I identified that would cause  the Fed to not raise rates, if they didn't do so in the wake of data they had been stating would support a rate hike.
Again from Josiah:
 Signs may appear in the economy which would prompt the Fed to increase the [money]creation rate but when would they recognize them and would they be correct in their assessment.
My response:
This is simply an absurd comment given the current Fed and their operations, The Fed isn't watching the money supply to any significant degree. As I regularly point out in the ALERT, the money supply is meandering with no seeming driven policy direction from the Fed. I have further noted that Janet Yellen has yet to even use the term "money supply," in any Fed statements or in her press conferences. The idea that the Fed is going to look at some piece of data and think, We must increase "the creation rate" of the money supply is based on total ignorance of how this Fed thinks. They are focused on interest rates and there is no sound Austrian economist who holds the belief that a lowering/raising of interest rates necessarily increases/decreases the money supply, other factors especially the price inflation rate play a major role on the outcome of an increase or decrease in interest rates and money supply growth changes.
To be sure, as Bernanke did, the Fed will flood the system with money at the time of a crash or major crisis  but the idea that "signs may appear" where the Fed decides to increase money supply outside of a crash (and a crash, for the decision under discussion, seems to be ruled out given Josiah asks "how would the Fed know what the signs are?"). There are no non-crash signs that would cause this Fed to think in terms of increasing the money supply, given how the Fed currently thinks. And it is an extreme error, no sound Austrian would make, to think a rate hike/cut would necessarily slow/increase money growth. Indeed, I expect rates to climb significantly over the next couple of years (to 5% plus) but I expect money supply growth to continue strong over that period.
Writes Hollow Daze:

 Doubling down already? I'm starting to wonder what the purpose of this blog is. We'll see negative rates and cash illegal before any rate hikes. It'll be done for the "chillruns" and against the "terrists", of course. The Fed cares not about its "credibility" in the eyes of the .000001% of people who understand its machinations. It only cares about allowing the "system" to live another day. BTW, rate hikes won't crash "the economy" necessarily, but would crash the Fed-fueled speculative real estate, stock and bond markets.

My response:
No I am not "doubling down," I have held a consistent view that rates are headed much higher. 
I have said both here and in the ALERT that we are in the early stages of a multi-year period of Fed rate hikes. I wrote this in July:
 I believe we are at the start of a multi-year, perhaps multi-decade climb in interest rates. Although the general sentiment is that rates are yet to start climbing, the fact is that long-term rates bottomed in 2012 and have been climbing for more than a year.
And, it's good to see Hollow Daze add confusion about interest rates, Rising interest rates do not necessarily mean a crash of anything. As I have pointed out, it is very possible to have climbing rates and strength in the stock market and economy. To think otherwise is non-Austrian.
Writes Annonymous:
So, when we see employment go up in a manipulated boom, we know the tension between malinvested resources and consumer demand is that much greater.
This is why some of us see a bust coming.
My response:
Coming when? The very fact that we are in a boom-bust cycle means that a bust will occur eventually (or a total crack-up), but it appears you have a hidden implication that it will come soon. That may be the case, The "tension between  malinvested resources and consumer demand" is there but it doesn't mean it can not go on for a very long time. The key is the Austrian insight, which anonymous does not point out, and a sound Austrian would never fail to do, is that the "tension" stops when the Fed stops fueling the distorted structure, not before.. There is no magical time period of this "tension" which signals that a bust must occur. This is non-sound Austrian phrasing at best or at complete error at worst.
Anonymous goes on:
We don't know people's threshold for loss, but that's some pretty hot tension out there.
My response.
This makes little to no sense from an Austrian perspective. No Austrian school economist speaks of "tension." Further, for argument sake, using the term "tension,"  the Austrian theory is not outlined in terms of  "people's threshold for loss." It is about a central bank distorting flows in favor of capital flows and the question that this would cause one to ask is "How much money needs to be pumped in to maintain the capital structure?" Not some question about "people's losses."  It suggests extremely muddled thinking, though I suspect a talented Austrian contortionist could find a way to argue this muddled wording makes sense. That is, this anonymous is using such muddled wording that he may have muddled his way into a tiny bit of truth.

Writes  Anonymous:
How was your prediction of a rate increase "supported by sound Austrian economic analysis"

Were you wrong or was the theory wrong.
My response:
Forecasts on how individuals will act in the future is not Austrian theory.
Your question, however, does show your confusion about the nature of Austrian theory. 

Another Anonymous writes:
[I]sn't it possible for someone to say "(t)he Fed has "run out of bullets"" without relying on "sound Austrian economic analysis" but for other reasons?
My response:

No this makes no sense from an Austrian business cycle theory perspective and is at the heart of the confusion of many who think they are thinking in terms of Austrian theory.
A central bank can push money into the capital sector to distort the structure forever (or at least until it destroys the money that is being printed) To suggest that the Fed has in the current environment "run out of bullets" makes no sense from an Austrian perspective. Since Austrian theory says it makes no sense, you can not be an Austrian and think the Fed can be "out of bullets" for other reasons, given the current nature of the Federal Reserve and the technical manner in the way it creates money.
This Anonymous continues:
Do you need to rely on "sound Austrian economic analysis" to say that "(t)hat a minute 25 basis point increase in the Fed funds target rate is going, under current conditions, to crash the economy." (how is crash defined?)

My response:
You have a reading comprehension problem. I am saying the exact opposite. And such a forecast is based on Austrian theory and empirical observation.
The theory being a sound understanding of how the Federal Reserve creates money  (which every Austrian understands as do most other economists) and the empirical part being awareness that a small increase in interest rates is likely under current conditions to have little or no impact on money growth.
Bottom line. There is much confusion by those who think they are arguing from an Austrian perspective, when, in many cases, they are arguing in a fashion that is contrary to fundamental Austrian understanding. The comments to my initial post display the significant degree that this confusion exists.

-RW

40 comments:

  1. Austrian economics does not tell you how to read the degenerates at the fed and the plans of the regime at any point in time.

    Making the argument that knowing either way could be based on sound Austrian doctrine is just pointless nonsense.

    Those not drinking the koolaid can see perfectly well the corner the fed is in and that the rate rise is not coming till there is a dollar crisis. This whole dog and pony show you got here feels like something you have put on to justify your remarks earlier that they rate hike was coming that have clearly cost you credibility.

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    1. ^^This^^
      For the record, I never claimed to be an "Austrian" so, whatever. When rates go up existing bonds with lower coupons go down in value. Carry trades are destroyed. Stock buyback a financed by cheap loans end. Yeah, it's technically possible that they won't, but you sound like Yellen saying something like "we can't rule it out." By "doubling down" I meant you were attempting to justify your incorrect rate hike call with some dissembling about doctrinaire Austrian economics. So, you're a "pure" Austrian and the rate hike in Sept call was wrong.

      It's strange but I've seen some random things on other sites that make a case for Austrian economics being some sort of Rockefeller funded dialectic. Your reliance on dubious gov't statistics and MSM Fed propaganda to buttress your rate hike call almost appears to be designed to lend "controlled opposition" credibility to the Fed where no credibility exists.

      These things aside and despite some differences in opinion, I appreciate and am informed and entertained by the work you do on this site and TL. Keep it up...



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    2. I agree here. It is my belief that Mr. Wenzel's disagreement with other Austrians has more to do with the complexities of how the system works than any doctrinal differences I admit my writing was not clear on that subject though I find it somewhat clearer than Mr. Wenzel's response to me.I do admit an error in claiming that Mr. Wenzel disparaged the great Catholic thinkers, my memory isn't what it use to be. Mr. Wenzel did object to the linking of the Catholic Church and Natural Law which obviously isn't the same thing. I do believe he would benefit from reading more Aquinas for a number of reasons but that is a minor point.

      As to his downplaying of the stock market's behavior, I stand on my position. I am a subscriber to the Daily Alert, I believe most (all?) subscribers would agree with me that Mr. Wenzel believed that UNLESS a MAJOR crash occurred he was pretty darn sure that a rate increase was coming. That he once said, in his numerous warnings, that “Oh yeah, major volatility might cause them not to act too.” I find to be simple covering of one's behind. He was wrong, it happens.

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    3. Thank you for subscribing to the ALERT, but with all due respect, how do you know how much Aquinas I have, or have no,t read?

      As for my forecast on a rate cut, please look at the ALERT before the day of the announcement, did I or did I not write:

      "As I have already pointed out in the ALERT, the numbers the Fed is watching most closely have all flashed rate hike (especially the unemployment rate). Further,secondary data continues strong, including the home builder confidence number released today.

      "Also of significance is that there has been no major downside action in the stock market, since the recent mini-China crash.

      "Thus, unless the the troika. Yellen-Fischer-Dudley , get cold feet, the rate hike is coming."

      Thus this not indicate that I considered Fed "cold feet' as a reason the Fed might not hike rates, especially since in earlier ALERTs I pointed out that following the Chinese mini-crash that New York Fed prez Dudley was in a panic?

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    4. I read Bob's Alerts. I can confidently tell you you are confused. A crash was not needed to prevent a rate hike. A crash was needed for a new round of stimulus.

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  2. To me it seems like interest rates are just a way to determine the supply and demand for jobs since interest rates are ruled by the demand for capital goods and what drives the demand for capital goods? The demand for jobs and work, without a demand for work there is no demand for new factories being built so when the interest rate is rising it is a signal that people do not have a job and the capital-owners (factory-owners for example) need more money to buy machines and create jobs. A crisis is typically followed by a spike in interest rates because people get desperate for jobs and underbid each other which raises the profit rate per worker for the factory owner and that enables the factory owner to pay higher interest rates on capital-equipment (machines). All this ofc doesnt happen when the fed artificially suppresses the interest rate with fake money.

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    1. I am having a bit of trouble following your comment.

      From an Austrian perspective, it is the consumer goods that dictate the demand for capital goods. People want the end product, and capital goods are used to make them. Labor itself is a capital good, so to say that the demand for jobs leads to production of capital goods is not correct. It is the demand for consumer goods that leads to both jobs in the production of consumer goods and capital goods.

      Investments in capital goods are made out of savings (and loans from savings). With increased preference for saving (due to lowered time preference by people), more investments are made in higher order capital goods, because the lowered time preference lowers interest rates.

      Money printing mimics the effects of lowered time preference (ie it appears more money is being saved) and artificially lowers interest rates. This tricks business people into thinking that there is more savings. So, they invest more heavily in capital goods, just as they would if there actually was a lowered time preference. But since the consumers have the same savings:consumption ratio (ie time preference isn't lowered, so the people want the same proportion of spending to go to consumer goods rather than investments / saving), these investments turn out to be malinvestments.

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  3. I don't think anyone has a problem with your pointing out logical errors in his thinking. Or a problem with your holding a contrary opinion about what the Fed may choose to do. But I do think people who are good faith students of / practitioners of / believers in Austrianism don't appreciate being smeared as "so-called Austrians." This is a pejorative term. It connotes intellectual negligence at best and hypocrisy or malicious duplicity at worst.

    "But, further, from an Austrian perspective there can not be negative interest rates. Where rates have gone marginally negative. it is not because people have suddenly decided that they are willing to pay to loan their money out, it is possibly a fee for safe keeping of funds and transnational convenience or possibly a tax"

    When commenters like me refer to NIRP, or negative interest rates, we mean nominal market ones of course. Duh!

    The money supply, credit, and banking system is a centrally planned, heavily manipulated market where negative nominal market interest rates are very possible. Just a stroke of a pen away. I'm surprised I need point this out.

    I like how Thorsten Polleit puts it:

    "Market interest rates may become negative in real terms. In a 'hampered market,' for instance, the central bank can push the real market interest rate into negative territory." - https://mises.org/library/natural-interest-rate-always-positive-and-cannot-be-negative

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    1. Pay attention.There are many high profile players who operate under the Austrian banner that know less about Austrian economics than Paul Krugman, from hedge fund managers to newsletter writers. My post wasn't aimed at any one individual but a general warning. These operators deserve the monicker, "so-called Austrians." The commenters are just reflecting the erroneous thinking of these so-called Austrains. They should adjust their views. For the major players who are sometimes identified as Austrian, it is too late, they are not going to change, be waryof them.

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    2. Thanks for addressing my comment in your post. when I think of Austrians I automatically think of folks at the Mises institute. I would be surprised to find one from that circle holding to the positions that you rightfully argue against. I don't read newsletters or listen hedge fund managers. I also tend not to pay attention to poor thinking among blog commenters. I incorrectly thought you were talking about person or persons that are influential thinkers in the Austrian School.

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    3. High profile news letter writers?? Lol. Like who??? Jeff berwick? He is to Austrian economics as Gary johnsonson is to libertarianism.

      Take a word of advice from Tom woods. Aim up when looking to smash people, not down. Why waste your time?

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    4. I didn't even know Berwick had a letter until recently when someone pointed out he was Dollar Vigilante, which I guess I quoted once. But I am not aiming at Berwick. I did not have him in mind when I made my initial post. I repeat, there are broad-based errors by many who claim to be Austrian. It is a general warning.

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    5. @RW

      It's not very informative to make a vague claim there are "major players who are sometimes identified as Austrian" making "broad-based errors" and telling us to be wary. If I don't know whom specifically I'm supposed to be wary of. Or why I should be wary of them, i.e. what are their fallacious statements. Without such specifics, I have no basis to change any of my behaviors.

      If I were to vaguely caution you "There are thieves out there, beware," this is not helpful to you. I am conveying no new information that could influence any of your thinking or behavior. You already knew there were thieves out there, somewhere, stealing somehow, some time.

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    6. Face it sonepatchworth,, Wenzel slammed you good. Read between the lines. if he is not namimg names it is obvious why. If you can't figure out who he is thinking about that is your problem. It is pretty obvious to me.

      Just look at the quotes he is using and who is saying them. This is not rocket science.

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    7. @Anonymous

      Perhaps I'm insufficiently traveled in Austrian circles but the only Austrian I've heard whose statements I recognized were Peter Schiff's. However, above, RW specifically denies he was referring to Peter's views. So I genuinely have no idea whom he is referring to. If you know, pray tell. I'll go read their stuff and see if I concur with RW or not.

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  4. I, for one, appreciate this post. I having been reading and studying on my own in an attempt to better understand Austrian economics. I try to read all of your posts explaining the theory. When you address responses in this manner, I learn so much. Thank you Bob.

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  5. My view is that the Fed waited too long to tighten. The boom cycle is ending or has ended. Now they are likely going to be forced into easing again. Unlike the previous boom cycle, where the Fed raised the Fed funds rate from 1.0% to 5.25%, they have failed this time to raise rates even the slightest bit. Things are different this time around.

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  6. RW, I think it is worth pointing out that a lot of people use QE just as shorthand for printing money. Yes, it is incorrect, as QE refers to a specific type of open market purchase, but it has become common terminology. It is a way of communicating to people using the terms they've heard.

    So, when someone says: the Fed is likely to launch QE4 or QE-4ever, they don't necessarily mean that the Fed will actually stick with this type of open market purchase. Instead, they often mean that the Fed will launch another major open market purchasing program (of some type of asset).

    I personally wish the Fed would make a $1 billion open market purchase of my house. I could then put that $1 billion in my bank account and the bank could park it as reserves back at the Fed (since it is their only option), and either keep all or part of it as excess reserves or create some new money of their own for loans or whatever.

    My point is that using the term QE doesn't necessarily indicate that someone doesn't understand Fed open market operations.

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    1. Agreed completely. Just people being loose with the term. Everyone except RW understands what's being referenced - money printing. Moreover the term "QE" is applicable to not just bond buying but any financial asset buying. If it continues with QE, the Fed may indeed not continue to buy bonds. But it will certainly buy other financial assets like stocks or derivatives before it dreams of buying physical assets like houses or oil tankers. QE is an entirely appropriate synonym for money printing at this point.

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  7. You keep coming back to "what the fed is going to have to do" and I dont see your point. Who cares what they are going to have to do? They're not in the business of doing what they have to do, if so they would all sit down and eat a bullet. We're dealing with crazy people doing crazy things. You may as well look at an adict and conclude that sooner or later he's going to have to clean up. NO! Sooner or later he is going to die.

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    1. RW can correct me if I'm wrong here, but it seems that he is basically saying that the interest rates are beyond the Fed's control. They can artificially tamp them down, but the market is king and interest rates will rise regardless. The view would not be that the Fed would suddenly become sane in its actions, but that they wouldn't have a choice but to raise the rates.

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    2. @Anonymous

      Go to the head of the class.

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    3. The Fed always has a choice of what to do. It has a legalized printing press. It can A) Keep inflating the bubble no matter how high the mounting costs of doing so or B) decide the cost has become too great for its tastes and raise rates.

      Donxon is predicting they may never opt to pay the higher short term cost of a rate raise and instead print straight into hyper-inflation and beyond until the economy, financial markets, and/or dollar collapse outright. Many nations have gone this route. Rome, Germany, Mexico, South American countries, etc. This is a very possible scenario.

      Anonymous and RW are predicting the Fed will change their minds when they see the escalating costs of fighting off market pressures when that becomes more acute in 2016 or 2017. Then the Fed will choose to reverse course to raise rates even while that triggers economic calamity. This too is a very possible scenario.

      Who knows how megalomaniac central planners operating under false economic premises will react!

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    4. Most car accidents involve a driver losing control of his vehicle. Once control is lost, the driver might "change his mind" several dozen times between the loss of control and the actual impact. It doesn't matter what they decide AFTER they lose control. I do not think the FED will decide to counter inflation until it is too late. They're still trying to get more inflation. By the time they realize the ball is moving, it will be too late to slow it down. Think about how crazy US foreign policy gets. It's because the people at the top have fanciful ideas about their ability to control the world around them. The generals and policy analysts who make these crazy plans all understand themselves to be very clever experts it their fields. They have lots of degrees and got great grades. They don't care about obvious and unavoidable problems created by their plans because in their world all you need is a well written paper and a good grade then everything else falls I to place. The FED is no different. They are astrologers playing at science living in a self-contained world that is insulated from any of the consequences of their crazy behavior. Such people don't wake up and change course until after the plane has crashed into the mountain.

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  8. Well, I guess the Mises Institute is pretend Austrian now, too!

    http://wiki.mises.org/wiki/Austrian_business_cycle_theory

    "Projects which would not have been started before, seem now profitable, creating malinvestment. They increase demand for production materials and for labor and their prices rise, which, in turn, leads to an increase in prices of consumption goods."

    I specifically had this in mind and nearly copied and pasted this for my comment, but according to Robert:

    "This is a perfect example of someone who thinks he is an Austrian. But his statement is completely incorrect from an Austrian perspective."

    Thanks for chopping up my comment and taking out all the parts you have said yourself over and over, especially the point about malinvestment. Yes, I'm a pretend Austrian, talking about malinvestment. Oh, brother...

    How convenient for you to prove the existence of these mysterious pretend Austrians by just deleting anything anyone says about Austrian economics!

    You also excluded the context. I was trying to answer a specific question about how the Fed reacts to silly aggregated numbers.

    Is that not what you have been saying, day in and day out, when you are talking about how the Fed will raise rates because of figures they watch, like the unemployment rate?

    I didn't say that a general price increase causes recessions. I was referring to how the funny money hops from one capital market to another.

    For heaven's sake Robert, you even quoted the part about stocks and bonds!

    We could use the price of oil instead of the CPI:

    https://research.stlouisfed.org/fred2/series/WCOILWTICO

    But the Fed does not react to the oil price. That was not the question.

    Input costs often rise at the end of the cycle, which does tend to show up in the CPI, while stocks and bonds rising earlier in the cycle do not. Jeff Herbener has pointed this out repeatedly. Is he also a pretend Austrian now?

    I can't even make sense of this part:

    "Further, the commenter is using empirical justification for his theory, which is an outrage in the eyes of sound Austrians."

    It was simply a Fed chart of the past. You post them all the time. Those are your words, not mine.

    Mises pointed out that statistics have some use for economic history, just not predicting the future. I didn't post an econometric model and then claim I could tell you what the price of X is going to be in Y time frame.

    For the complete context, here is the question I replied to and my full response:

    http://www.economicpolicyjournal.com/2015/09/the-absurd-idea-that-fed-is-not-going.html?showComment=1442610188874#c6006400457451345854

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    1. You are quoting a wiki page, which could have been written by a confused 10 year old kid? Precisely the problem I warn about. You would never find such a comment by Rothbard. In fact, as I quoted, he says the exact opposite in America's Great Depression.

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    2. Brandon, when you speak of every recession being kicked off with a spike in the CPI, it is (intended or not) phrased in a way that implies that this empirical observation proves economic theory. Yet according to the ABCT, there is not necessarily a spike in the CPI or any other assets. In fact, in an unhampered free market, prices of goods have a tendency to decline (ie price deflation). This is because (all other factors equal), as the economy progresses, the same amount of money is chasing after an increasing number of goods. Printing money has the opposite effect. If you held the number of goods constant, and had more money, prices would go up. In a dynamic economy with Central Bank monetary inflation, neither the number of goods or the number of dollars are constant. Therefore, these two tendencies fight against each other. So, you can actually have price inflation where prices are decreasing (ie real prices are going down, but due to the monetary inflation, they're still higher than they would be). The opposite is also true, but I'd need to go into much more detail to explain the process here, and my comment would be too long.

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    3. I think you misinterpreted, "Note that every recession is kicked off with a spike in the CPI..." as a blanket statement.

      That was referring to the linked chart of most FOMC history, especially after Bretton Woods collapsed. There was no FOMC in the 20s, so not too helpful for the OP's question of why they're unlikely to keep ZIRP forever.

      Also, I did the chart link wrong and it should be percent change, as I'd said, not the straight line:

      https://research.stlouisfed.org/fred2/graph/?g=1TOo

      Sorry for the confusion. The point was to make the FOMC's historical trend clear.

      -------------------------------

      As for ABCT's relevance, I stand by what I said about inflation hopping across exposed malinvestments, a process which starts without a Fed rate hike, but can certainly lead to many.

      We've seen this over the last year, with stocks and bonds volatile, commodities crashing, but no bust phase level defaults.

      So where did it go? Rental units and sub-prime auto loans. The boom is still on.

      Similarly, when high food prices set off the Arab Spring, the euro crisis sell off had just sent funny money looking for a new home, and the boom continued. Food prices, many of which are determined on heavily traded commodity markets, are certainly tied to banks.

      ABCT helps explain why inflation is consistently funneled into this handful of places.

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    4. "Yet according to the ABCT, there is not necessarily a spike in the CPI or any other assets."

      Oh, I'm not disputing that. Let's kill this dead with reductio ad absurdum:

      There could be an all time record inflationary business cycle where the price of every single thing drops, every single day of the boom - and there's still a bust!

      Some might say that's just about the case in Japan, even including financial assets.

      ...but that's not what happened here lately. :p

      My point (apparently poorly worded) was that the FOMC's old dogs can't learn new tricks. Most of this echo chamber learned their...uh..."trade" from the culprits of the 70s stagflation. ZIRP and QE considered, the business cycle is playing out like the last few they inflicted upon us.

      In Keynesian lala land (certainly far removed from anything Austrian), they will likely respond to a CPI hike with unemployment ~4-5% and become caught in the same old trap. But even if they don't "prick the bubble," so to speak, malinvestments run their course and leave them in a similar position.

      The only link I meant to make between the CPI and ABCT is that a few things included in the CPI are driven up by credit expansion:

      Housing, cars, fuel oil, gasoline, college tuition, some food, tobacco...
      http://www.bls.gov/cpi/cpifaq.htm#Question_7

      This often comes in a sort of "mania" phase before the bust, when conventional investments are not paying off. Hey, it's not my fault the BEA puts this in a "consumption" index!

      I'm not saying it's a rule, just that we have more incite as to why it has become (not always has been) a pattern than the Keynesians.

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  9. Robert, if the Fed had raised rates, you would have shouted about your prescient prediction from the rooftops. But since it didn't come to pass, well, it wasn't really a prediction? And certainly had nothing to do with Austrian economics.

    I've noticed this with other Austrian economists like Bob Murphy, they make a prediction, and if it goes their way, they take credit for it, but if it doesn't, then, well, it wasn't a real prediction. And certainly had nothing to do with Austrian economics. It was just their own personal side-bet. This kind of silliness doesn't inspire confidence in this discipline.

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    1. Where have I said that I didn't make a prediction? I have quoted in comments and posts my forecasts from the ALERT before the Fed move and the conditions which I thought could result in a failure for the rate hike I expected to occur from occurring.

      Please don't lump me with others. I have know idea what Murphy does after making prediction errors, if indeed he does make errors. But I have not now, nor ever, been afraid to lay out what my past forecasts were.

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  10. " As for those of you arguing that I created a strawman and you want to know names, not identifying someone is not creating a strawman. A strawman is about distorting an argument so that it can easily be knocked down without getting to the essence of the point,

    As I will show in the rest of this post, there are many, as evidenced by comments to the initial post, that hold the views that I tried to knockdown in the post.

    As for my being "petty," for pointing out what I see as errors in the thinking of others, well that's what I do at EPJ all day long."

    We cannot know IF you are distorting an argument because you refuse to link to the claims you are "smashing". We cannot know if these claims were actually made. We cannot know in what context these claims were made. We cannot even know if they were made by people that claim to be Austrian. We have to trust you on everything.

    I am not claiming you used strawman arguments. The original person who brought up strawman (whom you quoted here) asked a question. A question is not an accusation. You inferred the accusation when all you needed to do was copy and paste a couple links.

    All you have done is copied and pasted comments to your post and "smashed" them. You still have not linked to the alleged claims you "smashed" in your original post.

    This leaves open the possibility that you used strawman. The only way for your readers to know you did not is to provide links.

    If you are "not afraid to call (Austrians who have been very kind to RW) out on points I disagree with them on" and you did not strawman please provide links to each of the claims or predictions you "smashed" in your first post.

    Linking to your intellectual opponents is the only way to have an honest discourse. I am afraid your refusal to link to these "so called Austrians" is intellectually dishonest and unacceptable.

    Imagine if a Keynsian blogger referenced your failed prediction of interest rates without naming you, refused to link to any of your material, then used your failed prediction to conclude that Austrians don't understand interest rates.

    Would that be fair?
    Would that be honest?


    Is linking to sources too much work? What possible reason could there be to continually refuse to provide links?

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  11. Thanks Robert! The 1929 crash resulted in major bank failures. If you google a chart of the total credit market as a percentage of GDP, you'll see a spike and crash in 1929, and then a huge buildup to today. I don't think the periodic dips we've had have really been meaningful corrections. This fiat, debt-based money is just insane to me and I don't think this system is stable. Alright back to my bunker, hehe.

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  12. @ Robert W:

    Can you listen to this 10 minute interview with Michael Pento, please?

    Http://kingworldnews.com/michael-pento-9-20-15/

    The website claims he is a specialist in Austrian economics.

    I'd like to hear you debunk what he says, if you can.

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    1. I'm obviously not Robert, but I don't think he's going to respond to your comment, so I'll give it a shot.

      First, the economy isn't weak. It's in a boom phase. Most of the new money is just flowing into capital goods sectors such as the stock market, housing and manufacturing, as ABCT would predict. Consumer prices are the last prices to rise. Of course, those started rising pretty quickly too in 2013-2014. Now it's mostly just oil weighing down the price indexes. There is no good reason to assume the Fed hiking the Fed Funds rate would lead to a flattening of the yield curve, especially with China currently selling again. This is not healthy economic growth for sure and will lead to a bust, but Fed manipulated booms are just as "strong" as non-Fed manipulated booms.

      Second: Pento also says the Fed would have to label any rate hike a "one and done" and inflation would get out of control. That doesn't make any sense. If inflation is spiraling higher, the Fed can hike rates all day long and remain behind the curve. The Fed would have to hike the Fed Funds rate to like 3% to have a prayer of choking off money growth right now.

      Third: His talk about declining unemployment leading to more workers and more production, which would help absorb inflation in a stable money environment is kinda sort of true, I guess, but misleading. First, M2 is up like 40% since the financial crisis. Not exactly a stable money environment. Second, with increased employment comes more confident consumers. More confident consumers equals more consumer spending. More consumer spending equals upward price pressure on inflation indexes. Remember, Rothbard said prices in the aggregate are determined by the amount of money and demand for cash, so I'm not positive Rothbard and/or Bob even agree that higher output is counter-inflationary.

      I've personally considered Pento a quack, and that interview did nothing to change my mind. In fact, it makes him a contender for the shyster category still too.

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    2. I view Jeff Berwick in the same light as Pento for the record...

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    3. Thanks for the reply. I genuinely wanted to know. I am still trying to figure out what to make of Pento, I think most of the KWN guests and articles are propaganda...but I sometimes listen to them anyway to see what others are likely going to be swallowing. For example: Paul Craig Roberts and Gerald Celente - pure propaganda disinfo agents imo.

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  13. Why do people think this is strange and new? It's natural for people to differentiate themselves from those whose opinions diverge from their own.

    Back in August RW (see link below) coined the term "Austrian shallow" to describe people he felt weren't getting the full picture, and perhaps Austrian shallows might also overlap into the "certain so-called Austrians" group.

    http://www.economicpolicyjournal.com/2015/08/chickens-coming-home-to-roost.html

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  14. Go read what Bill Bonner has been putting out lately. Speaking of high profile newsletter writers. I'm not saying RW is targeting Bonner specifically, but go read his recent essays.

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    1. http://dailyreckoning.com/viva-zirp/

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