Saturday, December 14, 2013

The Theory of Max Keiser's Hero, Antal Fekete, Is Demolished

Dr. Tom Fischer is professor of financial mathematics at the University of Wuerzburg, Germany, and a member of the German Association for Actuarial and Financial Mathematics  and the German Risk Management Association.

He has an important new paper out on the theories of the so-called "New Austrians" and the distortion in definitions that lead them to their confused conclusions.

Here are key snippets:
This essay analyzes the definition and the use of the notion "arbitrage" in Antal E. Fekete's writings and comes to the conclusion that they are flawed and misleading. For instance, Fekete and his followers have repeatedly stated that backwardation in gold forward contracts should theoretically be impossible as this constituted an arbitrage opportunity. However, this statement is wrong under the generally accepted definition of arbitrage, as well as it is wrong under Fekete's own version of the notion. Whether and how much the problematic definition affects other parts of Fekete's work in economics, is not a topic of this article. However, this essay should serve as a warning to investors and researchers who rely on the writings of Fekete or his fellow "New Austrians" - particularly also with regards to the gold basis -, that not all is right in Fekete's theories[...]

If Fekete and his followers wanted to amend their theories, they need to drop the idea that all market transactions caused by differences in personal preference should be called "arbitrage", as it is highly misleading and will greatly confuse researchers and economists who are used to the generally accepted definition of arbitrage, which has served very well. For their theories to become at least logically consistent, they would also have to refrain from claiming that any market transaction constituted something like an arbitrage in the proper sense, as this simply is not true and could lead to incorrect conclusions. As I wrote in my earlier mentioned paper "Faux Gold Arbitrage" (reference [3]): "An arbitrageur does not need an economic theory or belief system. All she needs are prices that she can act on." So, arbitrage theory does not care about economic theory, be it Keynesian, Austrian, or "New Austrian", and this article is not on an economic or monetary issue. Scientifically, Fekete therefore has nothing to gain from not calling things by their proper names. Similarly, using the established names would not take anything away from new economic ideas he might have had. But if Fekete and his fellow "New Austrians" will not use the proper terms, or will continue using them improperly, they have a lot of credibility to lose. Months ago, while analyzing his theory, I contacted and repeatedly included Antal E. Fekete in correspondence regarding the issues raised in this article, as I wanted to discuss them with him in person. Fekete once wrote (reference [5]): "Science has nothing to fear from an open debate. Feeling of insecurity is characteristic of a cult." To this day, I have not heard back from him.
The full paper is here. 


  1. Fekete regularly comes across as an angry man – there is often such contempt in his writing.

    “Scientifically, Fekete therefore has nothing to gain from not calling things by their proper names.”

    Correct; however not calling things by their proper name allows him to obfuscate regarding his theories, which are as often quackery as not. Obfuscation is useful in order to keep his little ducklings lined up behind him. They are so enamored that they dare not say his work is incomprehensible. What they don't understand they attribute to Fekete's superior intellect.

    An example of quackery: “…gold does not obey the Law of Supply and Demand.”

    An economic good that doesn’t obey supply and demand! Who knew? For thousands of years, no one ever discovered(???) this about gold – until Fekete came along! (As best as I can tell, though I have not read Fekete directly on this but one of his acolytes, is that he attributes an objective value to gold based on some version of the labor theory of value - the amount of labor it took to produce the nugget is forever held in the nugget and the nugget holds the value of that labor. Yeah, I know; it doesn't make any sense to me either.)

    Recently he wrote a “New Austrian Economics Manifesto.” In it he calls for a rapprochement and dialogue between his “new” Austrian school – he claims based on Menger – and the (I guess “old”???) Austrian school – which he claims looks to Mises.

    Yet he cannot even get through this token attempt at opening a considerate dialogue without letting his contempt-for-all-things-Austrian-except-his-version of Austrian show through:

    “But those who bear the future of our civilization at heart, like Menger and Mises did, would put petty jealousy behind them. They would stop the name-calling and the mud-slinging. They would let the grand debate take place. Let truth win the day. Let the sound money movement rally under the banner of Menger.”

    It is nice to see he is open to a debate, with the “truth” already self-proclaimed!

  2. Thank-you for posting this! I am very interested in this kind of debate between the "new" Austrians and the Misesians.

  3. I've read Fekete's essays & agree with B Mosquito's critique that it is often incomprehensible. That said he has a better grasp on the nature of money than most. Gold does not obey the Law of Supply and Demand, at least not as it is generally espoused. Gold is defined by Constant Marginal Utility, the demand for gold approaches infinite, as does - at present - demand for $. The Law of Supply & Demand is less clear cut when applied to something which has infinite demand - supply can also be infinite. Look at the exponential growth of the liabilities of central banks, so why isn't the price of gold rising exponentially?

    People should remember that Fekete's theory of backwardation in gold is just that, it has never been proven. Tom thinks that backwardation in gold is the natural state. I agree. Contango in gold is an aberration that has - apparently - been with us for some time. Tom sees it as evidence of manipulation, whereas I just see it as a Ponzi scheme.

    1. "Gold is defined by Constant Marginal Utility…"

      If this were true, why would anyone ever trade gold (or money) for anything? Or, why would anyone ever want gold?

      Gold is an economic good, subject to the same laws as all economic goods. To suggest otherwise is quackery. That gold (or today’s digital FRN) holds a more “constant marginal utility” than other economic goods is inherent in why gold has historically so well satisfied the concept of “money” and why “money” has historically been best answered by gold.

      But “more” isn’t absolute.

    2. "That gold (or today’s digital FRN) holds a more “constant marginal utility” than other economic goods is inherent in why gold has historically so well satisfied the concept of “money” and why “money” has historically been best answered by gold."

      Yes, that's what I said. That's what Fekete says. So what's your problem with the idea? You are splitting hairs with this "absolute" stuff. If you'd bothered to read Fekete you would know he only claims that the marginal utility of gold declines slowest of any good.

      I on the other hand, say the constant marginal utility of gold is, for practical purposes, absolute. Gold is the highest quality good, nothing can match it. It is the standard of quality. The $ is the obligation of a bank. While the $ currently enjoys constant marginal utility, it will, one day, reveal its true nature as junk.

    3. I read his words where he has the opportunity to spread his message - even at his web site. It is about half enlightening and half garbage.

      “…gold does not obey the Law of Supply and Demand.”

      These are his words. This is laughable.

      He and his acolytes often write in such absolutes (gold has a constant marginal utility. Am I making this up?) - is it my fault that he and they cannot add a simple qualifier when trying to reach a larger audience, especially if the qualifier is consistent with his position as you suggest?

      What a joke.

      I have read enough of what he has written to know he is a quack. He does himself no service by repeating his quackiness at almost every turn.

    4. You're the quack. Gold does not obey the law of supply & demand, unless you include the possibility of infinite demand, & supply, in which case the law tends to break down anyhow.

      In practice, Gold does have constant marginal utility, it might as well be absolute because nothing else comes close. The $ is doing a good job of pretending, but that's because it's a Ponzi scheme. Ponzi schemes are irrational. The Fed is solvent as Bernie Madoff.

      You agree that gold has "more constant marginal utility than other economic goods", yet split hairs over one detail. You're the joke.