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:
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.
I'm Really confused by this article. I want to know names. Who are you talking about? Mr and Mrs Strawman?
No links to the alleged claims austrians are making.
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.
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?
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.
My response:Ep. 110: Yellen Admits Rates Could Stay at Zero Foreverhttps://www.youtube.com/watch?v=gi1v8AvZY4k#t=9m24sPublished 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?
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.
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.
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.
How was your prediction of a rate increase "supported by sound Austrian economic analysis"
Were you wrong or was the theory wrong.
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.This Anonymous continues:
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.
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?)
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.