Saturday, August 6, 2016

My Beef With Austrian-Lites

SpokAnCapAugust 6, 2016 at 1:40 AM makes the following comment:
Robert, As I understand, Austrian theory does not predict the decisions of the money printers, it only predicts what happens when they do print money (bubbles, etc). Therefore, I don't think your beef with the "Austrian-Lites" has much to do with I missing something here?

Also, I think the Fed will tend to aid in financing the massive debt bubble (and they fear making any drastic moves), so if there are any rate hikes, they will be relatively negligible.
My response:
You are correct in that Austrian economic theory is not a theory designed to directly predict central bank money printing moves.
My beef with Austrian-lites is that they claim we are now in a recession and that "the Fed has run out of bullets" and can no longer create the boom phase on the central bank boom-bust cycle.
From an empirical perspective, looking at current economic data, there is no indication that we are in a recession, if we understand that a recession is a period of adjustment from a prior central bank created boom period. 
We had such a period starting at the time of the  2008 financial crisis. Unemployment soared and capital goods prices such as real estate and the stock market crashed. That's what a recession looks like.
This was a classic recession as described by Austrian school business cycle theory. To claim we are in such a period now is simply ignoring the data, Employment data, be it government data, or private data such as ADP data, show no general decline in employment which you see in a recession. Indeed, it shows a strong employment market.
The stock market is hitting new highs and the real estate market is climbing. These are all occurrences you see in the boom phase of the business cycle.
When Austrian-lites claim we are not in a boom phase, they simply do not understand Austrian theory in terms of the business cycle and how a central bank can influence the economy.
There are other factors that can influence employment and the economy besides Federal Reserve monetary manipulations, such as high minimum wage laws, employment regulations such as Obamacare, but this has nothing to do with the Federal Reserve.
To blame all negative occurrences in the economy as Fed caused is ridiculous and causes one to take one's eye off the ball where the Fed does influence--and that is in regard to the structure of the consumption-capital ratio of the economy.
As for the size of rate hikes by the Fed, I have consistently said they would be too small to bring about the results they envision. This does not mean, I must point out, that we will not see 100 basis point hikes at some point down the road, regardless of how much debt the government has issued if  price inflation is strong enough. Don't fool yourself into thinking that all rate hikes in the future will be minuscule in size because of the government debt load.
If, just for example, price inflation is roaring away at 10%. And the Fed funds rate is at 0.25%, the Fed rate hike will be much greater than 25 basis points. Government debt is a factor in the equation but it is far from the only factor.



  1. There is also no Austrian rule that booms and busts are experienced evenly throughout the economy. As I learned it the theory is they won't be.

    This fed money pumping has created two distinct economies or at least two distinct perceptions of it. There is one economy where the fed money pumping is creating a boom. There is another where the last bust is still largely on-going. Where the economy is sputtering along with only a partial recovery if any and various measures are still at what used to be called recession levels. People see the economy they live in. They see the one for their location and/or their industry. That perception drives how they look at the measures of the economy and which ones they look at.

  2. Is it possible that the Fed's measures of price inflation are skewed to the downside, as John Williams et al. contend? Is it possible that the Fed is prevented from hiking by political considerations, such as the impact of cutting short the credit-fueled boom before a presidential election, as Peter Schiff et al. contend? Is it possible that they intend for an ever-rising market to provide yield to institutions such as pensions that have traditionally relied on bonds?

    RW posits that the Fed will be slow to hike in response to price inflation, but is it possible that they will forego hikes and knowingly pursue Mises' crack-up boom instead?

    (I honestly don't know)

  3. Thank you for the response. I am reading it now. Cheers!

  4. RW, I respect your work, however I am completely flummoxed by the cognitive dissonance in focusing on the results of manipulation in defining your boom and ignoring everything else pertaining to the real economy, which is generally in weak to awful shape. Could you do a post on something like why industrial production declines or corporate earnings declines should be disregarded?

    1. Real output in US manufacturing does not appear to have experienced a decline except during the 2008 crash as many individuals have often claimed. See here: