Wednesday, August 24, 2016

Considering More Austrian-Lite Confusion

I have already posted an exchange I had with an Austrian-lite (SEE: My Exchange With an Austrian-Lite) but more needs to be said and new comments have come in.

First, I didn't get into it in my first round but Guy Noir has repeated support for his view that I have knocked down previously. He wrote this time:
 Corporate earnings have been trending down for quite a while.
He statesd this fact as "evidence" of the poor shape the economy is in.

But he raised this same point just over two weeks ago. He is confused with  weakness in specific sectors versus what happens when there is a recession,where a downturn is across the board.

I go into the confusion in detail here:The Nature of the Business Cycle and the Current State of the Economy.

Also  entering the fray is Neil

NeilAugust 23, 2016 at 3:26 PMWhat I think Robert is ignoring, or at least not addressing to the public at large, is the extraordinarily easy monetary policy that persists at the Fed in the face of these booming asset prices and low unemployment numbers. The last time the capital goods sector looked like this, in 2007, the Fed funds rate was at 5.25%. Now it's under 0.5%. This is not your fathers' or your grandfathers' business cycle folks.

Say what? My entire point has been that we are in the boom phase of the Fed manipulated when the Fed blasts out new money that props up asset prices! I am countering Austrian-lites who say the Fed can't do this! I am countering the view that the stock market is about to crash and we are headed immediately into recession!
As for the level of the Fed funds rate, I liked the way commenter Danger Pioneer replied to this:
Danger PioneerAugust 23, 2016 at 6:17 PM@Neil - the absolute interest rate is mostly irrelevant - the interest rate only matters in context of what it is relative to what the natural interest rate would be if there were no central bank ... what matters far more is the rate of increase in money supply (which Mr. Wenzel does not at all ignore) ... looking at the Fed-set interest rate in a vacuum is mostly useless

Further, you can't compare interest rates over two different periods. Who is to say by how much interest rates are pushed down by Fed activity? You can come up with a number.

I recall having a discussion about this with Murray Rothbard in the early 1980s when interest rates were going in the other direction, skyrocketing, and analysts were saying, "Well, this will stop. They have not been much higher ever before."

We both agreed, "Who is to say how high rates can go? Historical levels have nothing to do with where they go from here."

I hasten to add, up or down.

Nest comes in Hollow Daze.
Hollow DazeAugust 23, 2016 at 7:48 PM@Danger Pioneer - What would the natural interest rate be if there were no central bank? When companies borrow money to buy back stock or hedge funds borrow to fund leveraged bets , do you really think they care about the "rate of increase in money supply"? Do you really think 5.25% vs. 0.05% rates is a meaningless comparison?
 @Danger Pioneer isn't saying that corporations don't care about the rate, All he is saying is that there is a market interest rate that can't be known when the Fed manipulates the money supply. We know it will be higher than the current rate but there is absolutely no way to determine by how much. That is all he is saying and he is correct.



  1. So the "natural interest rate" is unknowable (except that it's higher) but we should only be concerned with the absolute rate in the context of it? Pure "Austrian" academic gobbledygook.
    People are making leveraged bets on assets, stocks and houses in particular, and govt's are borrowing and spending like there's no tomorrow in an environment of attractive, super low interest rates. Raise the rates and watch the boom evaporate.

    1. The boom ended a while back. All that exists is dwindling speculation in Risk Assets.

      Where's the post on how great the July existing home sales are (not)?

      Blindness to the cognitive dissonance would explain why some just don't see the forest for the trees.

    2. If you have falling unemployment and rising asset prices, the boom is still ongoing. As far as raising rates go, as Robert has put forth previously, the Fed is going to raise rates slowly to let inflation run hot. Plus, because they are trend watchers, they will not realize things are too hot until it will require major basis point increases to slow price growth. You're going to know inflation is out of control before the Fed does anything that pops any bubble anytime soon.

      Plus I'd just like to add, many "lib lite" financial guys have been predicting for the past couple of years, wrongly, that we're in a recession and that the Fed is going to lower interest rates not raise them. If you predict this for long enough, it will happen eventually just as a stopped clock is right twice a day.

      Money supply is still growing. Even when Robert says it is cyclically slowing at 3%+ this time of year, that is still growth. As such, the Fed is still promoting the asset price growth. Where? Silicon Valley. Look at real estate. Look at startups. Look at salaries. Look at investor money. This isn't the housing bubble all over again. This is a combination of the tech and finance bubble from 16 years ago. It's started with regional easy tech money and it's rolling down-hill from there.

      Guy, since you're obviously in disagreement, instead of just making blanket statements, where's your data supporting the boom has ended other than July existing home sales, to which the boom/bust was never re-inflated other than in regional markets? By the way, there are very real reasons for existing home sales not booming again: Underwater existing homeowners from the previous housing/boom-bust. More stringent loan standards than from the "no doc / 0 down" days of the previous boom. "Easy Credit" doesn't exist in durable goods for those that cannot afford it anymore.

  2. The problem remains that the fed is juicing the official measures that determine recession or boom while having little or even negative effect on many others, especially far away from the spigots. When the fed can no longer prop the official measures what is the next bust going to look like when it spreads into areas that never fully recovered from the last one? Or do we trust in Ben Bernanke that there will be no interest rate normalization in his life time and the fed will be able to prop up official measures indefinitely? At some point there won't be any or enough stock left to buy back with borrowed money at any interest rate.

    When things went bust last time the fed took away interest on savings. What does it do next time? Take away the savings?

  3. Maybe you could write a post on my dozens of comments regarding your posts and comments over the last 7 years that interest rates are going to begin rising.

    Why is it that you don't talk about this fact? Is it possibly that you are in fact an "austrian-lite"? When you are right about a topic such as the failures of bit coin, you love to name call and mock the other side. But you don't have the courage or integrity to admit that you have been dead wrong about rising rates.

    It was the Spring of 2009 when you started telling readers to "lock in your rates now!".

    1. Wait, was not the trend correct? You cannot predict exactly when things will happen due to external factors and human behavior in the aggregate. Plus there have also been worldwide influences on the dollar that have made it stronger than otherwise. The whole EU is a mess and due to that we get to devalue more at less cost due to stronger demand. It's why the bond market hasn't popped yet. One thing is for sure, just like the last pop, when it goes, it's all going to go quick. And if you weren't positioned ahead of time for the trend, you won't have time to react when it actually happens.

  4. I predict the sun will be seen tomorrow. That will spur economic activity. We will see people going to work all across America.