Wednesday, May 2, 2012

Murphy Muddle and the Costly Error

Okay, I finally read Bob Murphy's piece. In my view, it is really a bunch of muddle not worth spending a lot of time on. So I will slice it and dice it post haste.

First, Murphy cleverly comes very, very close to implying that, in my prior post, I denied that there would be a decline in  Nonresidential Fixed Investment and Equipment & Software. He shows the declining data, in sort of a told you so fashion. I say so what?

My point in my initial destruction of Murphy was this:
Now, admittedly, tax laws do cause distortions in an economy, but that doesn't mean you can ignore the trillion dollars Bernanke is shoveling into the mix. Further, a tax distortion is not the same thing as a business cycle distortion. A business cycle distortion confuses all businessmen, as the interest rate is distorted and no one knows with absolute certainty what it would be otherwise, assuming one  knows that it is distorted in the first place.
Not for one sentence did I say that  Nonresidential Fixed Investment and Equipment & Software would not decline. I challenge Murphy to find it anywhere within my post.  What I said was that the economy was a lot bigger than  Nonresidential Fixed Investment and Equipment & Software and that with Bernanke printing aggressively the economy would be manipulated higher.

Now, let's go to exactly what Murphy (and Thomas Landstreet) wrote in their initial piece:
The hopes for a general rebound are misplaced, however, because temporary depreciation rules may be driving the apparent upswing.
Clearly, Murphy and Landstreet expected some kind of downturn. They concluded their piece most tellingly, this way (My bold):
Anecdotally, we know many businesses have been rushing to get their capital purchases “placed in service” before the 2011 deadline passes. This has given an artificial boost to business investment and other measures thus far, but investors should be ready for a sudden reversal come 2012.
In one sense this is typical Murphy muddled writing. It is not clear if he is just warning about a decline in  Nonresidential Fixed Investment and Equipment & Software or something bigger. But, if he was just warning about Nonresidential Fixed Investment and Equipment & Software, I again point out that I never disputed that such would occur. However, in his latest post, he seems to indicate that he was talking much bigger. The implication being that he was talking the entire economy. He, for example, points to the recent slowdown in GDP growth. So was there an initial grander warning, by Murphy and Landstreet, to investors than just over Nonresidential Fixed Investment and Equipment & Software? It appears so. Funny time to crow about such a forecast. The Dow just yesterday hit a four year high. It is at its highest level since 2007.

Also yesterday, The Institute for Supply Management said its national manufacturing index rose to its highest level in 10 months. Orders, hiring and production were all higher.

The report was issued  by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee, who stated (My bold). "Sixteen of the 18 industries reflected overall growth in April, and the New Orders, Production and Employment Indexes all increased, indicating growth at faster rates than in March."

Murphy also chimed in with this:
If anything I think 1q 2012 showed the exact opposite of Wenzel’s take: Business investment decelerated (or actually declined, depending on the category), while consumer spending and foreigner spending were up. If you were doing a standard ABCT explanation, isn’t that backwards?
My reply to Murphy on this is 1.As I have stated many times, the breakdown between consumer spending and capital goods spending that the government releases does not fall in line with how ABCT would breakdown consumer and capital goods spending. Auto purchases, for example, are considered consumer purchases by the government, I see them as capital goods purchases.

2. Murphy is completely ignoring the IPO market which was rocketing in 1Q. That's heavy money going into the capital goods sector, i.e. the stock market.

3. As Murphy should know, money supply was soaring at the end/start of the year at a plus 20% on a three month annualized NSA basis for M2. This has since slowed to around 6%. Thus, the sluggish but positive GDP, unemployment and other economic data. But note well: No downturn in the economy, just a slowed acceleration of the manipulated boom.

Murphy has this response in his post:
 So if he wants to say Bernanke has slowed his money-printing from when Wenzel bit my head off back in November, OK, but then he can’t at the same time mock Keynesians for being so pessimistic about the “manipulated recovery.” Bernanke can’t be simultaneously spiking and slamming the economy.
First, I always point out that what happens to the economy in a macro-sense is dependent on money supply manipulations. As I did in my initial demolition of Murphy:
ABCT holds that central banks print money which generally first goes to the capital goods sector. This flow of funds results in a (manipulated) boom in the capital goods sector. Federal Reserve Chairman Bernanke is now printing money (M2) at a rate of 15% plus. That is a lot of money to be hitting the system. In fact, over the last 12 months, it is nearly a trillion dollars. M and L apparently want to ignore this trillion dollars and hang their hat on depreciation changes.
So I have every right to call out Murphy and Keynesians for predicting a greater downturn, when in fact the economy pulled stronger. If Bernanke, since then has slowed money growth, as he has, I am consistent in saying, "Hey, things are going to go slower." It is based on my initial point that you need to watch money growth.

This Murphy-Landstreet focus on Nonresidential Fixed Investment and Equipment & Software as the driver of the economy, while ignoring money supply growth, smacks of an incredible delving into microeconomic data of the economy to attempt some kind of precise forecast. This points to Murphy-Landstreet failing to understand much of what Mises, Hayek and Rothbard have taught us. It fails to take in the grand picture of money supply and ABCT, itself.

Too much focus by the data collectors becomes focused on the data they can collect and not enough focus on the areas where minute data can not be collected. Fed money printing is done on a massive scale and enters the economy at many thousands of different points, so it is impossible to make exact forecasts. We can only have a rough idea of general trends. This focus on Nonresidential Fixed Investment and Equipment & Software is just mind-boggling. If indeed money flow slows into the Nonresidential Fixed Investment and Equipment & Software, does this mean that money disappears from the economy, or does it just head into other sectors? How in the world could this have anything to do with overall economic conditions.

On another point ,beyond the many weakness in the assembling of the GDP number itself, to proclaim some kind of victory because there was a decline in growth from 3.0% in one quarter to 2.2% in another quarter is giving much too much credit for the preciseness of the GDP numbers, themselves.

There is much more I could attack, but let me end with this, the Murphy-Landstreet advice that " investors should be ready for a sudden reversal come 2012," was a costly error, The Dow has gained 10.3% since the Murphy-Landstreet warning:


  1. I have seen people comment on these posts stating that Austrian economists should not be fighting each other. To that, I say, "That is ridiculous." Austrians are not a homogeneous blob. It is important for economists to debate important economic issues. This is healthy disagreement in a respectful manner. Mr. Wenzel, your analysis is very sound, but without reading Murphy's piece, I cannot make a judgment as to who I think is correct.