Saturday, February 13, 2016

The Merging of Austrian-Lite and Paul Krugman

This is really sad. There is a crowd out there who think the economy is in or near recession.

It includes Austrian-lites who have seemed to ditch the idea that the Austrian school theory of the business cycle is about a boom-bust cycle. For them it has become a bust only cycle(?).

This is really the Paul Krugman view. Despite a collapse in unemployment :

Despite upwardly trending real estate prices:

Despite a generally uptrending stock market:

Austrian-lites and Krugman hold the view that there has been no boom period since the 2008 financial crash. Krugman emphasized this yesterday:
It looks, in other words, as if we’re still living in the economic era we entered in 2008 — an era of persistent weakness, in which deflation and depression, not inflation and deficits, are the key challenges. 
 Persistent weakness? Depression? Is this guy serious? The same economic era since 2008?

What the hell has he been reading? Austrian-lite?

Unemployment has improved dramatically since 2008. So has real estate and the stock market. There has been some weakness in the stock market of late, but, as I have pointed out in the EPJ Daily Alert, this doesn't appear to be business cycle related.

For sure, the U.S. economy is based on a shaky structure created by Federal Reserve money printing and a total economic collapse somewhere down the road will occur, but it is possible we are years off from that.

Krugman calls out daily for the Fed to maintain low interest rates and the Austrian-lites hold the difficult to understand view that the Fed can never raise rates, In other words, they both hold a "rates near zero" perspective. Krugman is actually a bit sounder here becasue he actually understands that the Fed could actually raise rates from here, while the Austrian -lites don't think it can happen--that the Fed will be forced to keep rates at current levels or possibly lower them.

I hasten to add I am not forecasting that a Fed rate hike will necessarily occur at the next FOMC monetary policy meeting (March 15-16), but that the trend over time will be much higher rates.

Bottom line: The Fed isn't going to listen to Krugman or the Austrian-lites. In fact, the big surprise is going to be rapidly escalating price inflation in 2H 2016, by that I mean first inflation climbing up to 3%, as measured by government price indexes and then 5%. It will be price inflation at 5% that will surely force the hand of the Fed to raise rates, if they have not done so before then.



  1. They latch on to things like increasing trend towards part time jobs vs. full time, looser ways of counting unemployment and inflation, increasing costs of growing government, etc. In their justified hate for the state, they let it push them towards a non-Austrian perpetual bust mentality. That's unfortunate, it just harms our credibility, and helps the statists and Keynesians keep Americans in the dark. Thank you Robert Wenzel for keeping it realistic.

  2. So are you saying the lack of QE/significant money printing, as we have now, is not enough to end the boom, the boom needs no escalating money printing to continue?

    Are you saying the raising of interest rates, as we have now, is not enough to end the boom, the boom can continue despite the ending of artificially low interest rates?

    Are you saying mounting excess production in areas lacking expected consumer demand, as we have now, is not enough to end the boom, the boom can continue despite these shortfalls in expected revenue and associated business failures?

    You are saying we must first experience capital good price inflation and associated capital shortfalls before the boom can end?

    1. What makes you think a tiny raise in interest rates means an "ending of artificially low interest rates"?

    2. When one looks at the year to year money supply growth rates, one gets a different picture than Mr. Wenzel paints. M2 growth was running at a 10% y/y increase in August 2011, and ran over 9% for the first half of 2012. Since then there has a steady deceleration in money supply growth down to roughly 6% now. Hence, I am more cautious than he is concerning both the stock market and the economy in general. Again, this is not a difference in theory between us though I am sure there is some, but a matter of applying the theory.

    3. @David T

      December commenced the beginning of the ending of artificially low interest rates. The Fed announced it intends to raise rates 4 times this year as liftoff. The premise is the Fed has now (slowly) embarked on a path to raise rates back to what it deems to be "normal." Markets are forward looking.

      Merely slowing the rate at which interest rates are lowered is enough to thwart credit expansion at an ever-accelerating rate. Raising rates in the slightest, certainly does. Why do I think that unequivocally marks the end of the boom? Because:

      "The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market." - von Mises (not an Austrian-lite)

  3. Youre being incredibly disingenuous here Robert.

    "the Austrian-lites hold the difficult to understand view that the Fed can never raise rates"

    No free market supporter argues that the Fed can LITERALLY never raise rates. Schiff among others have said they can technically, but by saying "never" they mean that the Fed would pop the bubbles it created and severely damage its reputation and influence.

    In fact, it is YOU who is more Keynesian than them by strictly using statistical categories like unemployment and labor participation. Typical Keynesian focus. News flash! Labor is not homogenous, and neither are jobs. The labor markets are so diverse and "choppy" that labor statistics cannot account for a large part of itin a reatively reliable way.

    For example: under-the-table work, constantly-changing part-time hours in industries like restaurants and delivery jobs, self-employed jobs that are under reported or unreported, etc.

    Also, I never hear you mention when talking about the Fed's assessment of the economy, the fact that both imports AND exports are falling, which a huge sign of.....?

    1. Jobs numbers are particularly bogus. Underemployment in terms of slashed worker productivity is prevalent today. The workforce is heavily skilled to work in no longer necessary capacities and industries. The workforce lacks skills in necessary ones. Thus many are able only to find minimum wage type work. Not so rosy a "boom."

      A former 100K salaried, full-time, middle manager now gets 2 or 3 part time bartending jobs. Employment stats look great because each job counts. And because anyone working even 1 hour a week is considered employed.

      BLS: "CES employment is an estimate of the number of nonfarm, payroll jobs in the U.S. economy. Employment is the total number of persons on establishment payrolls employed full- or part-time...Persons on the payroll of more than one establishment are counted in each establishment."

      "People are considered employed if they did any work at all for pay or profit during the survey reference week. This includes all part-time and temporary work, as well as regular full-time, year-round employment."

  4. I still think the credit bubble is decades old, and that you are thinking too short-term.

  5. The problem is there are many measures where the present boom as it were has merely clawed its way up to levels that were previously considered recessions. There are significant parts of the country which for effective purposes haven't recovered even that much. There are places close to fed money taps that truly are booming as well.

    I believe Austrian theory holds that the government and central bank interventions become more massive for less effect. That is the booms become weaker and the busts deeper. The weaker (in absolute terms) boom appears to be the case on many fronts presently. This boom also appears dependent on continued intervention that would have been unheard of prior to 2008 in either form or degree.

  6. I'm generally in agreement with RW, which is why "possible" economic collapse caught my eye. I think any serious exogenous disruption (major earthquake, expanding war in the Middle East, major terrorist attack) could be beginning of a protracted economic crisis.

  7. Your theory is as good as the opposite one. Peter Schiff is now considered and 'Austrian-lite"? The Fed in the short to intermediate term have not used up all their bullets so the situation is still not clear.

  8. perhaps because its... both ie Stagflation

  9. Robert, I think you're going to end up eating some crow on this one. Any serious stock market analyst worth his salt will tell you behind closed doors that this market is going to drop out of bed fairly soon. I'm talking second quarter 2016 carnage 2008 style, but worse. Do you not notice the ominous problems in the European banking sector now rising to the surface? Deutche Bank is obviously a time bomb in my opinion. The only thing that could potentially prevent this from happening is the Fed surprising the market with a healthy dose of QE and a rate cut at the March meeting. And I think we all know the chances of that happening at this point are slim to none. The Yellen Fed seems to be reactionary not proactive.