How Stocks Performed During the Weimar Republic Hyperinflation

Thinking ahead, just in case Bernanke really loses it.

From Bearwatch:

It is well-known that German money became worthless in 1923, thanks to hyperinflation. The value of cash savings was wiped out; fixed rents also became worthless, which benefited the ordinary person; but practically all one's income was spent on food, instead (see Table 6 at the bottom of this page).


What is less well known is how investors who didn't have to sell their shares actually gained, after a market pullback.

BTW: In 1975 on Meet the Press, Friedrich Hayek named stocks as a way to hedge against inflation.

Keynes vs Hayek: The Cambridge vs. LSE Debates, 1932

Richard Ebeling emails:

Dear Bob:

Enclosed are two letters that appeared in the London "Times" in October 1932.

To my knowledge, they have never been reprinted.

On the "left" is a letter signed by Keynes, Pigou & Co. on the case for "stimulus" spending.

On the "right" is a letter signed by Hayek, Robbins, & Co., on the case against such spending and for freeing markets.

The battle continues . . . today!

Yes, indeed, the battle continues. This could be Krugman, Mankiw, Blinder [representing the Cambridge camp] versus Ebeling, Wenzel, Murphy, W. Anderson [representing the LSE camp], in 2010, with one exception. I believe that everyone in the the Ebeling camp would be even more hardcore anti-central bank intervention than even the LSE camp, in that they would not be anti-deflation. They would all back up the Murray Rothbard insight that the markets should simply be allowed to work out any deflation and that deflation, itself, is a great thing.

View these very important documents here.

Tyler Cowen: Nothing to Look at Here, Folks, Just Keep Moving

Tyler Cowen writes in today's NYT:

“THE ROAD TO SERFDOM,” the critique of socialism written 65 years ago by the Nobel laureate economist Friedrich von Hayek, was recently No. 1 in nonfiction sales at Amazon.com.

Many people, including the Fox News commentator Glenn Beck, have contended that growth of government power has, indeed, set us on such a road today. But the reality looks different. In many respects, the expansionary phase of big government is coming to an end, and quickly.

Oh yeah, the U.S. is coming home from Afghanistan and Iraq, real soon.

Obamacare is not really going to control what type of medical service is available in America. The new consumer agency stuck into the heart of the Federal Reserve is just a paper tiger.

And Obama really isn't getting a kill switch for the internet.

Everything is just peachy, like Cowen says.

How does Cowen reach this mad conclusion?

It's peachy, according to him, because of the Greek crisis. You see, aside from fighting wars,and paying for healthcare for the masses, the U.S. is on an austerity program because the Greek crisis is scaring Americans.

Cowen is pulling a slick trick here. He is claiming that government is about to shrink, and then switches the argument from the obvious growth of government to the fear of the Greek crisis.

Of course, the Greek crisis is a warning sign for what could happen to the financial sector in the U.S., that everyone can understand, but to translate this fear into the suggestion that government growth is over is absurd. Government is growing and taking control of our lives from thousands of different directions and it is doubtful the the fear of the Greek crisis will even have real impact in slowing the deficit.

Bottom line: Cowen has simply become an apologist for the state, twisting the reality of the situation to promote a benevolent view of a government that is a monster, that continues to growl and grow.

The truth of the matter is that the situation of an out of control government is very serious. Thomas DiLorenzo writes about the same Road to Serfdom that Cowen says doesn't apply to current America:

The parallels to today's world are unsettling, to say the least. Perhaps this is why, a few weeks ago, The Road to Serfdom ascended to #1 in sales on Amazon.com after Glenn Beck discussed the book on his Fox News Channel program. There may not be a Hitler on the horizon, but the extent to which governments all over the world have simply ignored the lessons of the past in response to the economic crisis that they created with their own monetary policies and other interventions is mind boggling. The US government, in particular, responded to the bust portion of the Greenspan Fed's boom-and-bust cycle with the most economically destructive — but politically centralizing — policies: trillion-dollar bailouts of failing corporations that will create moral-hazard problems the likes of which have never been seen; an escalation of the money supply that dwarfs the monetary inflation of the Greenspan Fed; the Soviet-style nationalization of automobile companies, banks, and much of the healthcare industry; government regulation of executive compensation; the appointment of dozens of dictatorial "czars" with unaccountable power to regulate and regiment myriad industries; trillion-dollar-a-year deficits; an expansion of the powers of the Fed (!); and a president who believes he has the power to fire corporate executives, nationalize industries, and send unmanned "drone" bombers to any country in the world on a whim.

Washington DC no longer recognizes any limits at all to its powers to "socially plan" all aspects of American life. This totalitarian impulse is not limited to national politics. The mayor of New York City believes he has the power to regulate all of the eating and drinking habits of New Yorkers, even including how much salt they consume with their meals and what type of soft drinks they can enjoy

Clearly, it's not that government is shrinking, it is that Cowen is one of the types of operators Hayek warned about in the chapter "The End of Truth". He called them "the totalitarians in our midst".

Cowen's attack in NYT on the application of the lessons in The Road to Serfdom to present day America makes DiLorenzo's upcoming course, The Road to Serfdom: Despotism, Then and Now, more important than ever. The big government apologists clearly want to muffle Hayek's warning that is contained in The Road to Serfdom.

Hayek's Road to Serfdom: Despotism Then and Now

By Thomas DiLorenzo

"Every economy has its contradictions …. What counts is results, and there can be no doubt that the Soviet planning system has been a powerful engine for economic growth." ~ Paul Samuelson, Economics, 1985 edition


"Contrary to what many skeptics had earlier believed, the Soviet economy is proof that … a socialist command economy can function and even thrive." ~ Paul Samuelson, Economics, 1989 edition


"The Road to Serfdom was 'inaccurate innuendo about the future'." ~ Paul Samuelson, 2009

When Friedrich A. Hayek published his classic book, The Road to Serfdom, in 1944 he was loudly denounced by academic statist apologists in England, where he resided at the time, and in America. In the preface to the 1976 edition of the book Hayek noted that a prominent philosopher even denounced the book despite admitting that he had not read it! But average citizens did read it. The book was a gigantic success in America, quickly selling over half a million copies. Millions of copies of a condensed Reader's Digest version of the book were also sold and widely read.

The court historians in academe were not concerned about Hayek's age-old warnings about the dangers that centralized political power posed to liberty and prosperity, for they intended to be beneficiaries of that power as well-paid advisers to the state. Millions of average citizens were not as enthusiastic, especially Americans who, during the war, had experienced oppressive and confiscatory taxation, the slavery of military conscription, government-imposed product rationing, pervasive shortages of basic staples, and endless bureaucratic bungling.

Hayek's motivation for writing The Road to Serfdom was the shocking speed at which so many Europeans – especially in Germany – had simply forgotten all that they had learned over the centuries about the virtues of a free society, the need for limitations on government power, the dangers of centralized power, and the workings of capitalism as a worldwide network of mutually advantageous exchange. It only took a couple of decades of socialistic sloganeering to persuade Germans to abandon their classical-liberal roots and embrace Big Government of the worst sort.

Hayek was deeply concerned that the same despotic ideas were also becoming more and more popular in England, America, and in other countries. As the above quotations of MIT's Paul Samuelson demonstrate, much of America's educational "elite" was enamored with Soviet communism and central planning. Samuelson even went so far as to say in his textbook, which was by far the biggest seller of its day, that "it is a vulgar mistake to think most people in Eastern Europe [during communism] are miserable."

The parallels to today's world are unsettling, to say the least. Perhaps this is why, a few weeks ago, The Road to Serfdom ascended to #1 in sales on Amazon.com after Glenn Beck discussed the book on his Fox News Channel program. There may not be a Hitler on the horizon, but the extent to which governments all over the world have simply ignored the lessons of the past in response to the economic crisis that they created with their own monetary policies and other interventions is mind-boggling. The US government, in particular, responded to the bust portion of the Greenspan Fed's boom-and-bust cycle with the most economically destructive – but politically centralizing – policies: trillion-dollar bailouts of failing corporations that will create moral-hazard problems the likes of which have never been seen; an escalation of the money supply that dwarfs the monetary inflation of the Greenspan Fed; the Soviet-style nationalization of automobile companies, banks, and much of the healthcare industry; government regulation of executive compensation; the appointment of dozens of dictatorial "czars" with unaccountable power to regulate and regiment myriad industries; trillion-dollar-a-year deficits; an expansion of the powers of the Fed (!); and a president who believes he has the power to fire corporate executives, nationalize industries, and send unmanned "drone" bombers to any country in the world on a whim.

Washington DC no longer recognizes any limits at all to its powers to "socially plan" all aspects of American life. This totalitarian impulse is not limited to national politics. The mayor of New York City believes he has the power to regulate all of the eating and drinking habits of New Yorkers, even including how much salt they consume with their meals and what type of soft drinks they can enjoy.

The subtitle of the 1976 edition of The Road to Serfdom, published by the University of Chicago Press, is "A Classic Warning Against the Dangers to Freedom Inherent in Social Planning." The exponential explosion of governmental powers in response to the current, government-generated economic crisis makes The Road to Serfdom as relevant today as it ever was (as Glenn Beck's audience instinctively understands). This is why the Mises Institute is offering a special five-week online class, The Road to Serfdom: Despotism Then and Now, under my direction through the Mises Academy, beginning on Monday, July 5. The course will be an in-depth examination and discussion of Hayek's analysis, its relevance to today's world, and how such ideas can be used to put America – and other parts of the world – back on the road to freedom.

Hayek's insights were remarkable, and remain so to this day. He understood and explained the power of ideas: European fascism could never have been adopted without a 25-year propaganda campaign against individualism (basic respect for the individual), classical liberalism, and free-market economics. He pointed out the "fatal conceit" of believing that government bureaucrats could "plan" an entire society. He explained why socialism – including its fascist variant – meant little more than "equality in restraint and servitude." "Marxism has led to Fascism and National Socialism," he wrote, "because, in all its essentials, it is Fascism and National Socialism [i.e., Nazism]."

Hayek saw through all the rhetorical tricks and gimmicks of the socialists of his day, one of which was the constantly repeated refrain that socialism and government "planning" was "inevitable"; therefore, it is futile to oppose it. Nor did he fall for the gimmick of wrapping totalitarian socialism in the mantle of the god of democracy. Government planning is inherently incompatible with both democracy and the rule of law in the long run, he explained, and leads to some degree of economic dictatorship. Any business person who has had to deal with the dozens of federal, state, and local government regulatory agencies knows that "economic dictatorship" is a key feature of the current American political system.

"The worst" always rise to the top of the political heap under a regime of government planning, Hayek explained, for they are the ones with the least qualms about brutalizing their fellow citizens and depriving them of their liberties. All of this can only be sustained by what Hayek called "The End of Truth," or the effects of massive government propaganda that demonizes the civil society, individualism, and the system of peaceful voluntary exchange and private property (capitalism), while glorifying all aspects of the state.

The purpose of this course, The Road to Serfdom: Despotism Then and Now, is to educate students about these contemporary dangers and arm them with the intellectual ammunition that they will need to oppose them and champion freedom instead. The totalitarian socialists of the early 20th century understood that they could not succeed unless they first discredited the ideas of freedom. The only way to stop their intellectual descendants ("the totalitarians in our midst," as Hayek would call them) is to counter their totalitarian ideas. Hayek was a hero of society for putting his career as a renowned economic theorist on hold (for most of the rest of his life, it turned out) to lay out one of the most articulate arguments for a free society ever made. We must revisit and strengthen these arguments if we are to choose capitalism and freedom over socialism and serfdom.

Reprinted from Mises.org.

Thomas J. DiLorenzois professor of economics at Loyola College in Maryland and the author of The Real Lincoln; Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe and How Capitalism Saved America. His latest book is Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution – And What It Means for America Today.

Publish Post

Fascialism: The New American System

Thomas DiLorenzo has coined in an important new term, Fascialism, to describe the current U.S. policy trend.

Writes DiLorenzo:

The two worst scourges of humanity in the twentieth century were socialism and fascism. Together, they wrecked much of the world economy because of their shared "fatal conceit" (F.A. Hayek’s term) that government central planners were superior to private property and free markets. Fascist and socialist governments (not that there’s much difference between them) murdered over 100 million of their own citizens, as the sociologist R.J. Rummel has documented (See his book, Death by Government), and instigated wars that caused the deaths of millions more.

Incredibly, the two-party duopoly that has long ruled America has adopted both fascism and socialism as the defining characteristics of our economic system. Call it Fascialism. It is a recipe for national economic suicide...Obama promises the worst of all economic worlds: A vast expansion of the welfare state form of socialism, as defined by Hayek, along with a heavy dose of old-fashioned, early twentieth-century, Stalinist socialism with the nationalization of banks, automobile companies, the health care industries, and whatever else he can get away with. The Mussolini-like cult of personality that has developed around him will facilitate this disastrous path to national economic suicide.

When I write that we are headed for serious problems in dangerous uncharted waters, I am not kidding.

We are way beyond the days of debate between the left and the right about whether a Welfare Queen should get food stamps in addition to her welfare checks. We are talking about serious command and control of the economy. DiLorenzo discusses the auto industry and the financial sector, but even in the last 24 hours there is more evidence that government control and expansion is going way beyond that.

I can't over stress the point that we are all going to face a serious decline in our standard of living. These are not tiny limited socialist moves that are going on, they are going to have major impact. We are all going to feel it. It will start with minor irritants and more forms to fill out, and then it will move on to noticing that for some reason you can't get this or that anymore, and it will move on to fear about what you are doing and how it will be viewed by the Fascialists.

How Zimbabwe Type Hyperinflation Could Come to America

Money manager Marc Faber says the U.S. economy will enter hyperinflation approaching the levels reached in Zimbabwe.

Zimbabwe’s inflation rate reached 231 million percent in July 2008, the last annual rate published by the statistics office.

I am not 100% sure the U.S. will go into hyperinflation, but I do believe it is a possibility that can not be ignored. As I pointed out in my post, The Big Collapse Could Be Very Near, the U. S. dollar is in a unique position because of its status as an international reserve currency:

Other countries have had collapsed currencies, but never in the history of the world of finance has so much currency been held outside a country of issue, that could come flying back, almost on a moments notice. If the panic out of the dollar starts, even if Bernanke stops printing money (unlikely), all the dollars flying back into the U.S. could cause a huge price inflation all on its own.

Couple this with the fact that the government needs to raise approximately $2 trillion in new debt this year, and something has to give.

Either government spending has to be cut way, way back--obviously unlikely under Obama, or the Federal Reserve is going to be buying a lot of debt by printing money. Who else is going to buy it? At some point the American public (and in the dollar's case, world dollar holders) figure out that the money printing is going to lead to more and more price inflation, and people start to buy anything rather than hold dollars. It will be the exact opposite of what we have now, instead of a strong demand to hold cash balances, the opposite will occur. There will be a desire to spend the depreciating dollars by keeping cash balances low.

At some point this madness takes on a life of its own. Treasury bond interest rates suddenly jump to 10%, which will be viewed as unacceptable by the Obama Administration and so Bernanke, by making huge Treasury purchases, gets the rate down to 8.5%, but the new money used to push rates down pushes price inflation even higher and, thus, puts upside pressure on Treasury bonds, which results in rates climbing to 15%. Of course, this will be viewed as unacceptable and Bernanke will have to add twice as much money as last time to get rates down to 12.5%. At this point the Chinese will be in total panic, and use the Bernanke buying support to unload the remains of the U.S. bonds they hold, which will mean even more money printing by Bernanke to take the Chinese out of their position. This will mean even more inflation and the Treasury bond interest rate climbing to 25%. And the vicious circle continues. That's how you can end up getting to Zimbabwe type inflation, 500 basis points at a time.

Nobel prize winning economist F.A. Hayek didn't title book his book on inflation, A Tiger by the Tail: The Keynesian Legacy of Inflation , for no reason.

Can this be stopped? Of course, it can. It would mean cutting government spending by 75% and a complete halt to Fed money printing would be required. It would mean a near complete restructuring of the economy. Is there anyone in office in a position to do this? I doubt.

Ron Paul has a strong following, but not strong enough to counter the Big Government supporters. Thus, it most likely won't be a planned restructuring of the economy. The market will take care of things and force restructuring through hyperinflation. It won't be pretty. A few who are quick and understand how to take advantage of hyperinflation will make huge fortunes. For the remainder, it will be a stunning collapse in their standard of living.

For years, investment newsletters have been speculating about such a hyperinflation scenario. We are now beyond the speculation stage. The end game has begun, whether we have 6 months or two years before things get really ugly, it is now clear to me that the problem is not 10 years out. The lightning of the coming storm is still somewhat in the distance but the sound of the thunder is getting closer and closer.

This is not a time to be casual about your finances. It is a time to pay close attention and read as much as you can about prior hyperinflations, so you will get clues on how to survive (and prosper) under what will be terribly difficult conditions for most.

I Hope Mario Rizzo Has His Tongue in His Cheek

I have been puzzling over a Mario Rizzo post for a few days. Rizzo is generally a pretty solid economist. He's not Hayek, but who is?

In the puzzling post, he asks the question, What Ended the Great Recession?

He lists three possibilities:

1. Fiscal Stimulus

2. TARP Lending to Banks

3. TALF and Securitized Lending

Is Rizzo saying that one of these government actions is what commentators will say ended the recession? Does he actually think one of these ended the recession?

Rizzo doesn't really say. Maybe there is some kind of inside joke I'm missing. To me, Rizzo's post is very poorly worded, at best. At worst, he's about as Austrian as Paul Krugman.

For the record, the "recovery" is a result of the Fed reversing monetary policy in late September 2008. From M2nsa money growth under 2.0% in the summer of '08, Bernanke completely reversed engines with money growth at double digit rates for months.That'll goose any economy.

Rizzo does mention the coming inflation, so may be he gets the money printing and just assumes it is understood.

I'm baffled.

Bernanke as an Austrian Economist, Luskin as a Con Man

Today's posts brought out the heavy hitters, with deep analysis.

Jeff Harding emailed me to point to an article he wrote this morning for The Daily Capitalist. His email was in response to my post earlier today commenting on Bernanke sounding like an Austrian economist, i.e. Hayek and Mises.

Harding picked up the same exact theme. What's more, I simply commented on the snippet that appeared in WSJ. Harding has a much longer quote taken from the speech itself, which suggests that Bernanke may really be having second thoughts about whether he can actually forecast the economy and manage the money supply correctly. Harding's piece is well worth reading for you deep Austrian followers in the crowd.

Stefan Karlsson also weighed in today with a comment at my post on Donald Luskin calling William Anderson a thin-skinned idiot Austrian Mafia capo.

Karlsson did a little digging and found that Luskin took a quote about Peter Schiff out of context.

Karlsson then puts the quote back in context, on his blog, and writes:

Would anyone interested in being honest and sincere to his readers really have viewed these following sentences as being irrelevant? I think not, confirming again that Luskin is nothing but a con artist.

Bernanke Almost Gets It

During a , commencement address Friday at the Boston College law school, Fed chairman Bernanke told the graduating law class that:

Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make.

This comment could have been written by F. A. Hayek or Ludwig von Mises. And is only about one step away in thought from Bernanke realizing that he can't successfully control the money supply, because of all the independent decisions made by human beings .

Madness from the London School of Economics

London School of Economics Professor Willem Buiter has written a truly bizarre column for FT.

There are more basic errors in Buiter's column than I have ever seen in one column before. Joe Weisenthal couldn't make this many errors in a column. Clearly, things have gone down hill since the Hayek years at LSE.

I'm just going to hit the highlights since to cover in detail the cluster of Buiter errors would take a book.

Let's first start off with the basics of basics. Buiter calls currency a bond:

Currency is an example of a bearer instrument. It is a negotiable bearer bond - it is transferable to another party by delivery.

It is a bearer instrument, since title to it generally belongs to the person in possession of it. And, it is an instrument (though this is an awkward use of the word instrument), an instrument of exchange, I prefer, as does most of the speaking world, medium of exchange. But, how does one jump from bearer instrument to bearer bond?

According to the business dictionary a bond is a:

Written and signed promise to pay a certain sum of money on a certain date, or on fulfillment of a specified condition.

How does currency fit into this definition? Not so well. There is no promise to pay anything. Further, there are no interest payments. I hasten to add that at one time dollars and pounds were warehouse receipts, but no longer. They are the currency. They are used as a medium of exchange, and no one ever expects them to be "redeemed"--which is the essence of a bond.

Buiter attempts this bizarre definition of currency because he wants to support the drunken proposal by Harvard Prof. Greg Mankiw (And obviously Harvard has gone down hill since the Schumpeter days) for a negative interest rate.

Writes Buiter:

There is no theoretical or practical reason for not having the Federal Funds target rate and market rates at, say, minus five percent...

Actually,there is a big problem. You can have a government negative rate, if banks are forced to keep deposits at the Fed, but it is the nature of coercive government that accounts for this possibility. On the free market, outside of a transactional fee for caretaking and custody of money, why would anyone put their money in a bank that is going to give you back less than you put in?

It's not going to happen, never ever.

Buiter even seems to get this momentarily:

Stricly [sic] speaking this story must be qualified in minor ways. If currency is the most liquid security, no other risk-free nominal instrument can earn less than it, net of carry costs (costs of storage, safekeeping and insurance). Carry costs for currency are higher than for Treasury bills or reserves with the central bank. The zero lower bound is therefore, strictly speaking a lower bound somewhat below zero. But not enough to achieve a minus five percent Federal Funds target rate.

But, not for long:

Fortunately, it turns out to be extremely simple to remove the zero lower bound on short, risk-free nominal interest rates.

He then calls for, hang on to your hat, the abolishment of currency. And, this, of course, is:

easy and would have many other benefits.

Benefits? Like greater government surveillance of every transaction conducted on the planet?

Buiter, does see one drawback, and I just checked to make sure he didn't write this column on April 1:

The main drawbacks would be the loss of seigniorage income to the central bank.

Although he is wrong on this point, he thinks the government wouldn't be able to inflate at will. And that is the drawback!

And, he has basically branded anyone who cherishes privacy a criminal:

The only domestic beneficiaries from the existence of anonymity-providing currency are the criminal fraternity: those engaged in tax evasion and money laundering, and those wishing to store the proceeds from crime and the means to commit further crimes.

He doesn't stop there:

Large denomination bank notes are an especially scandalous subsidy to criminal activity and to the grey and black economies. There is no economic justification for $50 and $100 bank note..

He is really nuts:

Instead of abolishing currency altogether, we could only issue low denominations, say nothing larger than $5 or €5...

Alternatively, he wants a tax currency stamp:

When the interest rate on currency is positive, the currency must be marked (by stamping or clipping coupons) to make sure the (anonymous) bearer does not present it repeatedly for the payment of interest. When the interest rate is negative, the (anonymous) bearer must (a) be induced to come forward to receive his negative interest (i.e. pay interest to the central bank) and (b) must be able to demonstrate that the negative interest has been received. To ensure (b), the currency must again be stamped or marked (electronically tagged). To get the bearer to come forward to pay the negative interest we can either rely on honesty and a sense of patriotic duty, or we can impose sanctions for non-compliance. I am afraid penalties for non-compliance (fines, a day in the stocks) would be required to make negative interest on currency work.

What the hell positive interest on currency is he talking about? Who is going to pay interest on currency that they don't have use of. And, of course, a "negative interest" on currency is just a tax that is also being promoted by Mankiw.

He then proposes a nutty new currency option, the rallod. And, he somehow twists the dollar as not being a currency, BUT securities will be denominated in dollars:

Now abolish the dollar currency and introduce a new currency, the rallod. The exchange rate between the rallod and the dollar is not constant. It can either be determined by the government or let by the market... since there no longer is dollar currency, the nominal interest rate on dollar securities can be negative as easily as it can be positive.

What can I say? Madness.

Buiter's conclusions:

I really don’t understand why central banks are not aggressively pursuing options for removing the zero lower bound. It is [sic]that they love the seigniorage so much? But they retain seigniorage revenue from currency issuance in the rallod economy. Is it hidebound conservatism and lack of imagination? Quite possibly. But if so, this is a costly mistake. Central banks should act to remove the zero lower bound on nominal interest rates now.

Obviously, this guy is totally nuts, but his proposals play into the hands of more government control of the economy, so he is likely to get more and more respect at conferences and from governments. Truly scary.

(HTbobmurphy)

"Hayek or Keynes. All else is footnote. "

--Mario Rizzo writes in a tribute to Hayek on the occasion of Hayek's birthday.

More from Rizzo:

It is a testament to the importance of Hayek that he and John Maynard Keynes have been the two great economists most invoked in contemporary efforts to understand our current financial and economic problems. In all of this, the monetarists unfortunately seem to have been sidelined. I suggest that this is because Hayek and Keynes represent the fundamental economic and philosophical challenges to each other. The question today is as it was in the thirties: Hayek or Keynes. All else is footnote.

Rizzo's full personal appreciation of Hayek is here.

The Grande Dame of Monetary Theory Speaks

Anna Schwartz (93) has granted an interview to City Journal on the topic of the current economy and monetary policy. It is clear that even at her advanced age she remains at the top of her game. Hayek, Mises, Schwartz, Friedman, great economists seldom die young.

On Alan Greenspan and Ben Bernanke she says:

Alan Greenspan, too often preferred to manage the economy—a fatal conceit, a monetarist would say. Greenspan wanted to avoid recessions at all costs. By keeping interest rates at historic lows, however, his easy money fueled manias: first the Internet bubble and then the now-burst mortgage bubble. “A too-easy monetary policy induces people to acquire whatever is the object of desire in a mania period,” Schwartz notes.

Greenspan’s successor, Ben Bernanke, has followed the same path in confronting the current economic crisis, Schwartz charges. Instead of the steady course that the monetarists recommend, the Fed and the Treasury “try to break news on a daily basis and they look for immediate gratification,” she says. “Bernanke is looking for sensations, with new developments every day.”

Here's Schwartz on the stimulus package:

President Obama’s stimulus is similarly irrelevant, she believes, since the crisis also has nothing to do with a lack of demand or investment. The credit crunch, which is the recession’s actual cause, comes only from a lack of trust, argues Schwartz. Lenders aren’t lending because they don’t know who is solvent, and they can’t know who is solvent because portfolios remain full of mortgage-backed securities and other toxic assets.

I would add that the slowdown in money supply over the summer of 2008 was the specific cause of the intensification of the downturn this fall. It's surprising, given that she is the ultimate monetarist that she does not mention this.

Schwartz on systemic risk:

What about “systemic risk”—much heard about these days to justify the government’s massive intervention in the economy in recent months? Schwartz considers this an excuse for bankers to save their skins after making so many bad decisions. “The worst thing for a government to do, though, is to act without principles, to make ad hoc decisions, to do something one day and another thing tomorrow,” she says. The market will respond positively only after the government begins to follow a steady, predictable course. To prove her point, Schwartz points out that nothing the government has done to date has really thawed credit.

On the coming inflation:

Schwartz indicts Bernanke for fighting the wrong war. Could one turn the same accusation against her? Should we worry about inflation when some believe deflation to be the real enemy? “The risk of deflation is very much exaggerated,” she answers. Inflation seems to her “unavoidable”: the Federal Reserve is creating money with little restraint, while Treasury expenditures remain far in excess of revenue. The inflation spigot is thus wide open. To beat the coming inflation, a “new Paul Volcker will be needed at the head of the Federal Reserve.”

At this point, I would take a Paul Volcker, but we really need even better.

Obama: Master of Smooth Rhetoric and Operational Madness

Peter Boettke analyzes President Obama in light of last night's speech. I think Boettke nails it. Obama comes off as a man of reason, even though his policies may be mad. I would further suggest that Obama must have contempt for just about everyone, if he is also lying about his true goals, e.g., as Boettke asks "how sincere does one believe..[Obama's] claim that the US government wants to return the banking system and the auto-industry to the private sector as quickly as possible really is?"

Here's more from Boettke:

Ok, who listened to President Obama's press conference last night discussing his first 100 days in office? If not, track down a transcript. First, despite the fact that the questions are scripted and it is not an open give and take forum, Obama is masterful at making one think it is an open and critical dialogue in which the best argument wins. His rhetoric appeals to anyone who finds reasonableness a virtue --- which should be anyone. Conservative pundits often point back to Reagan as the example of rhetorical master, but Reagan was a rhetorical master based on an ideological
principle --- "Mr. Gorbachev Tear Down This Wall" or "Trust But Verify" when
dealing with the "Evil Empire". Obama is a rhetorical master for the egg-head class. We want rigorous debate, we want all sides heard, we come at this with no ideological blinders on, but instead let good argument and evidence win the day. We listen hard, think even harder, and make up our minds based on reason and evidence. He uses this rhetoric so much, we believe it. Politics not by principle nor by interest, but politics as good conversation, where good is defined by the norms of academic debate in the ideal. It is as if the intellectual culture of the University of Chicago has come to Washington...

Whatever doubts one might have, one must admit that to egg-heads the professorial style that Obama adopts and the ease with which he speaks to us is pretty effective that he is a man of "reason" and not ideological emotions run amok all the while his administration is engaged in a series of hyperactive ideological moves to transform the US economy. Obama is masterful in his rhetoric, but the consequences will be devastating in reality if the mainline of economic thinking (from Adam Smith to F. A. Hayek and Milton Friedman) is the more accurate portrayal of reality. The most ambitious ideological dreams do run afoul of a refractory reality.

Boettke's full post is here.

Mankiw the Ultimate Inflationist

I can't think of any economist that is as great a current day inflationist as Harvard Professor Greg Mankiw. Here's his latest astounding comment:

As to the Fed announcing a commitment to a moderate amount of inflation, let me point out that according to many macroeconomic historians, the abandonment of the gold standard was the most useful thing that the federal government did to get the country out of the Great Depression. A commitment to producing a moderate amount of inflation would be the modern equivalent of that act.

The most useful thing to do to get the country out of the Great Depression? A relatively steady money supply, which would be the result of a true gold standard, would eliminate the business cycle. F.A Hayek received the Nobel Prize for this insight.

Going off of the gold standard resulted in a strong restraint, against government money printing, being removed.

When the hyper inflation hits, as result of the goading of Mankiw and the like, will he resign his position at Harvard? It would be the honorable thing for him to do.

On Economist Robert P. Murphy

Special notice, if you have arrived at this post searching for the economist Robert P. Murphy, please note his web site was attacked by hackers who placed copy on his site which resulted in Google removing his site from their index.

The malicious code was removed from Murphy's site by his webmaster, yesterday. However, it will now take a number of weeks before a Google spider re-indexes Murphy's site. Given that Murphy is about to launch a book Monday, The Politically Incorrect Guide to the Great Depression and the New Deal, this could not happen at a worse time for him. He is scheduled on numerous radio shows to discuss his book and there are likely to be many searches for Murphy's name, looking for his web site.

So for the record (and especially for the search engines), Robert P. Murphy's blog is called Free Advice and can be found here.


Here is Murphy's full curriculum vitae so that if by chance he mentions something from it and you are searching one of these details, you will also find him:

EDUCATION

Ph.D. Economics, New York University, Spring 2003
B.A. Economics, Hillsdale College, Magna Cum Laude, 1998

FIELDS OF SPECIALIZATION

Climate Change, Interest Theory, Financial Economics, Trade, Game Theory

FIELDS OF INTEREST

Law & Economics, Political Economy, Public Choice

DISSERTATION

Title: Unanticipated Intertemporal Change in Theories of Interest
Committee: Mario Rizzo (chair), Alberto Bisin, Boyan Jovanovic

EXPERIENCE

Senior Fellow, Bus. & Econ. Studies, Pacific Research Institute, Sept. 2007 – present.
Economist, Institute for Energy Research, May 2007 – present.
Research Analyst, Laffer Associates, September 2006 – June 2007.
Visiting Scholar, New York University, June 2006 – August 2006.
Visiting Assistant Professor of Economics, Hillsdale College, August 2003 – May 2006.

CLASSES TAUGHT

Principles of Microeconomics / Macroeconomics
Intermediate Microeconomics
Game Theory
History of Economic Thought I and II
Austrian Economics I and II
Honors Seminar on “Spontaneous Order”

REFEREED PUBLICATIONS

“Are Residual Economic Relationships Normally Distributed? Testing an Assumption of Neoclassical Economics” (with Thomas Bundt). The Review of Austrian Economics, forthcoming.

“Interest and the Marginal Product of Capital: A Critique of Samuelson.” Journal of the History of Economic Thought, forthcoming.

“Cantor’s Diagonal Argument: An Extension to the Socialist Calculation Debate.” The Quarterly Journal of Austrian Economics, Vol. 9, No. 2 (Summer 2006), pp. 3-11.

“A Note on Walter Block’s Defending the Undefendable: The Case of the ‘Heroic’ Counterfeiter.” American Journal of Economics and Sociology, Vol. 65, Issue 2 (April 2006), pp. 463-467.

“Hans-Hermann Hoppe’s Argumentation Ethic: A Critique” (with Gene Callahan). The Journal of Libertarian Studies, Vol. 20, No. 2 (Spring 2006), pp. 53-64.

“The Labor Theory of Value: A Critique of Carson’s Studies in Mutualist Political Economy.” The Journal of Libertarian Studies, Vol. 20, No. 1 (Winter 2006).

“Dangers of the One-Good Model: Böhm-Bawerk’s Critique of the ‘Naïve Productivity Theory’ of Interest.” Journal of the History of Economic Thought, Vol. 27, No. 4 (December 2005), pp. 375-382.

“The Economics of the Very Long Run” (with Walter Block). Homo Oeconomicus, Vol. 19, No. 4 (2003), pp. 507-517.

SELECT BOOKS

The Politically Incorrect Guide to Capitalism, Regnery 2007.

Study Guide for Ludwig von Mises’ Human Action, Ludwig von Mises Institute, forthcoming.

Study Guide for Murray Rothbard’s Man, Economy, and State with Power and Market, Ludwig von Mises Institute, Summer 2006.

SELECT POPULAR PUBLICATIONS

“Soaking the rich won’t solve boom-and-bust cycles.” San Jose Mercury News, July 23, 2008.

“Rising demand, weak dollar cause pain at the pump.” Buffalo News, June 23, 2008.

“Can the Feds Save the Housing Market?” The Freeman: Ideas on Liberty, Vol. 58, No. 5 (June 2008).

“Designing the Market’s Mechanisms.” Barron’s, May 12, 2008.

“Memo to the Fed: Stop Those Rate Cuts” (with Lee Hoskins). Forbes.com, March 17, 2008.

“Socialized Oil Can’t Replace Market Sense.” Investor’s Business Daily, December 13, 2007.

“Can Free Markets Be Designed?” Forbes.com, November 15, 2007.

“Welfare for the Rich.” The Freeman: Ideas on Liberty, Vol. 57, No. 3 (April 2007).

“Are CEOs Paid Too Much?” The Freeman: Ideas on Liberty, Vol. 56, No. 8 (October 2006), pp. 8-12.

“Hurricane Katrina Shows that Government Is Too Small? It Just Ain’t So!” The Freeman: Ideas on Liberty, Vol. 55, No. 10 (December 2005), pp. 6-7.

“An Aging Population Is No Threat to a Free Society.” The Freeman: Ideas on Liberty, Vol. 55, No. 3 (April 2005), pp. 16-18.

“Hypnotized by Models,” (with Gene Callahan). The Freeman: Ideas on Liberty, Vol. 55, No. 2 (March 2005), pp. 38-41.

“What’s Wrong with the Poverty Numbers.” Ideas on Liberty, Vol. 54, No. 4 (April 2004), pp. 18-21.

“Let Us Not Speak Falsely Now,” (with Gene Callahan). Ideas on Liberty, Vol. 54, No. 2 (March/April 2004), pp. 28-34.

“Michigan’s Poor: How Much Do Numbers Alone Really Tell Us?” Mackinac Center Viewpoint, No. 2004-07 (March 2004).

“Nationalized Health Care Will Cut Costs?” (with Gene Callahan). Ideas on Liberty, Vol. 54, No. 1 (January/February 2004), pp. 6-7.

“Markets Aren’t Efficient?” Ideas on Liberty, Vol. 50, No. 12 (December 2000), pp. 6-7.

“Absurd Assumptions & Counterintuitive Conclusions: The Case of David Friedman.” Reason Papers, No. 25 (Fall 2000), pp. 69-72.

“The Origins of the Public School.” The Freeman: Ideas on Liberty, Vol. 48, No. 7 (July 1998), pp. 403-406.

…and over one hundred online articles at sites such as LewRockwell.com (Murphy archives), Mises.org (Murphy archives), EconLib.org (archives), FrontPageMag.com, and TownHall.com.

BOOK REVIEWS

Nigel Lawson, An Appeal to Reason: A Cool Look at Global Warming. Reviewed in Economic Affairs, forthcoming.

Peter Boettke and Peter Leeson (eds.), The Legacy of Ludwig von Mises: Theory and History. Reviewed in The Journal of the History of Economic Thought, forthcoming.

Richard Nelson (ed.), The Limits of Market Organization. Reviewed in The Independent Review, Vol. 11, No. 1 (Summer 2006).

Steve Keen, Debunking Economics. Reviewed in Review of Austrian Economics, Vol. 16, Issue 4 (December 2003), pp. 381-384 (with Gene Callahan).

Leland Yeager, Ethics as Social Science. Reviewed in The Journal of Libertarian Studies, Vol. 16, No. 1 (Winter 2002), pp. 106-114.

Butler Shaffer, In Restraint of Trade: The Business Campaign Against Competition. Reviewed in The Journal of Libertarian Studies, Vol. 15, No. 4 (Fall 2001), pp. 113-116.

Ingo Pellengahr, The Austrian Subjectivist Theory of Interest: An Investigation into the History of Thought. Reviewed in The Quarterly Journal of Austrian Economics, Vol. 4, No. 1 (Spring 2001), pp. 85-89.

SELECT MEDIA APPEARANCES

Testimony before House Financial Services Committee on oil markets and the U.S. dollar. July 24, 2008. (Written testimony, YouTube clip #1, #2.)

Fox Business TV interview on oil prices. June 2008.

“PIG Day,” Phyllis Schlafly’s Eagle Forum with Politically Incorrect Guide authors; Murphy talk aired on C-SPAN’s BookTV July 29, 2007.

MoneyDots with Barbra Alexander, Politically Incorrect Guide promotion, aired nationally week of April 29, 2007.

The Source radio talk show. P.I.G. promotion. April 15, 2007.

Janet Parshall’s America. Nationally syndicated radio talk show. P.I.G. promotion. April 10, 2007.

“The Five Most Common Myths About International Trade.” Speech delivered at Ludwig von Mises’ Supporters Summit, October 28, 2006. (audio / video)

“The Weekend Interview Show With Scott Horton” radio program. Hour-long discussion on libertarianism, Austrian economics, central banking, trade deficit, etc. June 18, 2005.

Pete Ferrand radio talk show. (WRJN AM 1400 out of Racine, WI) Hour-long discussion on international trade, outsourcing, etc. March 2005.

PROJECTS

Headmaster of the Mises Classroom, an online forum for subscribing students.

Home Study Course in Austrian Economics, Ludwig von Mises Institute, September 2005.

WORKING PAPERS

“Rolling the DICE: Nordhaus’ Dubious Case for a Carbon Tax.” (Submitted to Southern Economic Journal.)

“The Rational Expectations Objection to Austrian Business Cycle Theory: Prisoner’s Dilemma or Noisy Signal?”

“The Sraffa-Hayek Debate: Natural Rates of Interest and Lessons for Modern Austrians.” (Submitted to History of Economic Ideas.)

“Radical Subjectivism and Mixed Strategies: A Comment on O’Driscoll and Rizzo.”

“Large Voter Turnout in Two-Candidate Elections.”

“Private Solutions to Positive Externalities: Military Expenditures, Insurance, and Call Options.”
REFEREEING

History of Political Economy

The Journal of the History of Economic Thought

The Quarterly Journal of Austrian Economics

Review of Austrian Economics

The Independent Review

Human Rights Review

GRANTS & AWARDS

Visiting Faculty Fellowship at the Ludwig von Mises Institute, Summer 2005.

Rowley Fellowship at the Ludwig von Mises Institute, Summers 2000-2002.

First Place in Society for the Development of Austrian Economics graduate paper competition for “Interest in the Austrian Tradition,” Fall 2000.

Bradley Fellowship, NYU, 1998-2002.

Again, Murphy's blog site is Free Advice.

Bob Murphy, the CPI and the Future

Bob Murphy comments on today's CPI numbers (and yesterday's PPI number) that show deflation:

CPI Officially Fell At 1.2% Annualized Rate in March (!)

Well hmm. If today's CPI numbers had shown a positive (seasonally adjusted) growth rate, I was all set to trumpet from the mountaintops: "WAKE UP PEOPLE!!

Bernanke et al. keep warning us of 'deflationary' pressures when there were three straight months of price hikes higher than the Fed's alleged 'comfort zone' throughout the whole first quarter of 2009!!"But alas, my case is now rendered dubious by the announcement that the (seasonally adjusted) CPI fell 0.1% from February to March.OK look kids, yesterday I tried to do the honest thing by admitting that the falling PPI number was disconcerting, for those of you who share my estimate of my own economic acumen. So I hope you will not now roll your eyes when I question these BLS numbers.First off, if you look at the actual BLS release (top row), you'll see that the unadjusted CPI rose by 0.2%--an annualized rate of 2.4%--from February to March. OK? So the BLS's "seasonal adjustment" took a 0.2% increase and transformed it into a 0.1% decrease. Notice that that's a change of 150% downward from the raw number...Last point, and I realize this is anecdotal: Have you folks been grocery shopping lately? I am quite sure that the prices of just about everything are a lot higher now than they were a year ago.

Bob is correct here on all points. Part of what is going on is a distortion because of BLS seasonal adjustments. As I have pointed out, sales of a lot of very immediate consumer goods such as movie, sports and concert tickets have been strong, and their prices appear to be decidedly up from last year. Thus, it is easy to see the BLS is not completely picking up what is going on at the consumer level. The numbers are distorted. (As a matter of fact, there are a lot of distortions at the BLS, beginning with the fact that CPI isn't a labor statistic, which means the Bureau of Labor Statistics should really be called the Bureau of Statistics and we could then officially refer to the data they put out as the BS numbers.)

Getting back to business, if you look at the three month CPI data, i.e., January to March data, you see that almost all the categories are in positive territory. But still the overall annualized CPI for the three month period is only 2.2%. This has to be a frustrating number for Bob to see because, as he then points out, Bernanke is really pumping in the money:

Let me very briefly explain why all the people talking about "credit unwinding" etc.--and making comparisons to the Great Depression--are missing a big point. From 1929-1933, the quantity of money (let's say M1) declined by about one-third. During 2008, M1 increased by 17%. OK, everyone got that? Not only did Bernanke prevent the quantity of money held by the public from falling, he boosted it at one of the highest annual rates in history. I'm not talking about bank reserves or the Fed's balance sheet--which Bernanke of course has exploded--I'm talking about cash in circulation and checking account balances.

Bob, again, is exactly correct here. So has the BLS gone out and completely distorted the CPI numbers all out of whack? I think not. Their seasonal adjustments are mildly out of whack and their are problems I have with what they sometimes call a consumer good, but the big suffocater of the inflation is real and is what FA Hayek called a secondary deflation.

Here's Steve Hanke writing in 2002 about the then mild downturn that really nails the current situation (My emphasis):

If this hangover phase-working off excess capacity and transforming the capital structure to shorten the length of production processes-is not bad enough, the economy is vulnerable during this phase to what Austrians termed a "secondary deflation." If a general feeling of insecurity and pessimism grips individuals and enterprises during a Hayekian hangover, risk aversion and a struggle for liquidity (cash reserves) will ensue. To build liquidity, banks will call in loans and/or not be as willing to extend credit. Not surprisingly, banks are already scrambling for liquidity. During the past 17 months, banks have been cutting back on corporate lending, shunning especially industries like energy, textiles, steel and telecommunications that over-invested during the boom. Moreover, banks are charging higher rates and bigger up-front fees on most other loans, even to top-rated companies. Households, too, are liquidating assets to increase their cash positions and pay down debts. Indeed, they pulled $13.8 billion out of U.S. equity mutual funds in June. This scramble for liquidity will put a further damper on investment as well as consumption.

Several aspects of a secondary deflation are worthy of further comment. If the forces of a secondary deflation are strong enough, a central bank's liquidity injections can be rendered ineffective by what amounts to private sector sterilization. When people expect falling prices and a real deflation, their demand for cash will increase, soaking up liquidity injections. This has been the recent experience in Japan, where prices continue to fall in the face of year-over-year base money and yen note (cash) growth rates of 30 and 15 percent, respectively. While milder forms of a so-called secondary deflation don't result in real deflations, they do undermine economic growth and extend the life of Hayekian hangovers.

Even though the primary cause of a downturn is an over-investment boom, understood in the Austrian sense, Hayek acknowledged that a secondary deflation could ensue and that it could be best understood in Keynesian terms.

I think that has been what has been going on. The extreme desire for cash and near cash (demand deposits) versus even holding balances at mutual funds was a sign of the fear that was prevalent. This absorbed a lot of the Fed's money printing. Of course, Bernanke's continued money printing will eventually overcome this demand for cash and cause a flight away from cash. The current strength in the stock market, in my view is the first signal of this. Once the "recovery" is obvious the inflation won't be far behind. But it will be "recovery" first, inflation second and then panic climbs in inflation.

Big Time Warning from Allan Meltzer on Inflation

Meltzer tells Bloomberg it is going to be worse than the 1970's:

Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation “will get higher than it was in the 1970s,” says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent...

M2, a broad measure of the money supply that includes checking accounts and money-market mutual funds, rose in the last six months at an annual rate of 14 percent. That compares with an average 6.3 percent during the last decade.

Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers. That’s similar to the pattern that occurred back in the 1970s, he says. Then-Chairman Arthur Burns allowed excessive money-supply growth because he was unable or unwilling to resist pressure from President Richard Nixon’s White House to hold down unemployment, leading to the “great inflation” of that era, he says.


Now, Bernanke and fellow policy makers have “squandered their independence” by becoming involved in bailouts of financial firms and by taking long-term and illiquid assets onto their balance sheet, Meltzer says. “They don’t have the political ability to control inflation.”

This is the first mainstream politically connected economist to be so highly critical of Bernanke.

Meltzer served, from 1973 to 1999, as the Chair of the Shadow Open Market Committee, a group of economists, academics, and bankers that met to critique the actions of the Federal Reserve's Federal Open Market Committee. He served on the Council of Economic Advisors for both Presidents Kennedy and Reagan. He is currently a visiting scholar at the American Enterprise Institute.

It is also the first time I have seen M2 money supply growth mentioned by a mainstream financial news service.

Of course, the story mentions Friedman instead of Ludwig von Mises and Friedrich Hayek, in relation to money supply theory, but it is better than nothing. Friedman focused on money supply as the inflation culprit, which is correct. But his mathematical aggregate manner of looking at money supply resulted in his never understanding the business cycle and also caused him to make some embarrassing inflation forecasts in the 1980's.

Oh Boy, Obama Plans to Nominate Alan B. Krueger as Assistant Secretary of Treasury, Economic Policy

Alan B. Krueger is co-author with David Card of Myth and Measurement. Somehow in this book, they manage to throw overboard the law of supply and demand, to reach the conclusion that "the claim, that a higher minimum wage cuts jobs, lacks support."

At one point, they report among a number of "main empirical findings" that (page 3):

Increases in the minimum wage also generate a "ripple effect", leading to pay raises for workers who previously earned wages above the minimum wage.

It is difficult to understand how Card and Krueger can even be considered economists with such beliefs. If one does not believe in the law of supply and demand for the labor market, can one believe in the law of supply and demand, at all, for any market?

As if to prove that they are not only attacking mainstream economic thinking in their book, but have advanced problems with Austrian economists, Card and Krueger specifically go out of their way to state that they are,"[b]orrowing from the natural sciences" their method of research.

Of course, Nobel Prize winning Austrian economist F.A. Hayek in his brilliant book, The Counter-Revolution of Science , demolished the notion that the methodology of the natural sciences could be used in the field of economics. He returned to this most important topic in his Nobel Lecture:

It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude — an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed." I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.

In short, President Obama is about to nominate to the Treasury, for Undersecretary, Economic Policy, an "economist" who doesn't believe in the law of supply and demand, and appears not to have a clue as to the proper methods of investigation for the world of economics.

Ladies and gentlemen, this nomination is a disaster. I fear the policies that will come out of Treasury.

NYT Discovers Austrians as a Sane Antidote to Kondratieff

NYT's Kyle Crichton reports on the fact that because of the current economic crisis the Long Wave theory of Nikolai Kondratieff is gaining in followers again.

Crichton chronicles the life of Kondratieff and reports that Kondratieff, a Russian, was beheaded for bad economics, during a Stalinist purge. He then writes:

Over the years, Kondratieff’s appeal has waxed and waned in counterpoint to the economy, falling out of favor in good times but charging back when things look bleak. But his theory has never been accepted by mainstream economists, who consider it an occult hall of mirrors in which any sort of pattern can be discerned by shifting starting dates and definitions.

Crichton then finds, David Colander, a Middlebury College economic historian and an expert on economic crank theorists, to pronounce Kondratieff, well, a crank.

But Colander then goes on to offer an antidote to Kondratieff, the Austrians.

Writes Crichton:

The Austrian line of thought made something of a comeback in the Reagan years, but never quite gained acceptance in the economic fraternity, Mr. Colander says.

“It probably should,” he says.

“A good profession should take its outsiders more seriously,” Mr. Colander says. “They make you look at things in different ways. The worst thing for policy makers is to think they are right.”

Crichton adds:

Austrian economists tend to emphasize a laissez-faire approach and entrepreneurship (not the most popular policies at this moment) and strict limits on money supply growth, usually by hitching the currency to the gold standard.

While considered outside the mainstream, the Austrian School is far more respectable, counting in its ranks two Nobel Prize winners, Friedrich Hayek and James Buchanan. Peter Schiff of Euro Pacific Capital — an adviser to the Libertarian presidential candidate Ron Paul and one of the most prominent doomsayers in the current collapse — also subscribes to its theories.

Hayek is said to have successfully predicted the Great Depression and some Austrian School devotees are taking credit for calling this one. “The financial meltdown the economists of the Austrian School predicted has arrived,” Mr. Paul wrote in September, 11 days after Lehman Brothers filed for bankruptcy.

(Note: For a thorough devastating critique of Kondratieff see The Kondratieff Cycle: Real or Fabricated? by Austrian economist Murray Rothbard)

Book Review: Meltdown by Thomas E. Woods Jr.

It is a sad fact that most who graduate from college understand little if anything about the business cycle. It is even a sadder fact that most economists do not understand Austrian Business Cycle Theory (ABCT), even though the great economist Friedrich Hayek was specifically awarded the Nobel Prize in economics for the work he completed with regard to the theory.

Perhaps to some degree this poor understanding explains the confused reporting about the causes of the current economic crisis that regularly appear in mainstream media. If you are only getting your information about the current crisis through mainstream media reports, trust me, you aren't even getting half the story.

Meltdown by Thomas E. Woods Jr. is an antidote to this lack of understanding. Woods takes on the many fallacies that are now a part of the popular perception held about the current crisis. He does this by walking through, in timeline fashion, the start of the current crisis with the housing bubble, through the Wall Street bailouts and current government attempts to "battle" the downturn. At each step, he explodes the myths that currently exist and explains what the real causal factors are.

Woods then explains the business cycle itself, and the role of central bank manipulation of the money supply as the main culprit in creating the business cycle. This chapter alone is worth the price of the book.

From there, Woods reviews other booms and busts, including the Great Depression, and explains how they came about.

Woods concludes with an explanation of the role of money in an economy and then offers sound solutions to today's crisis that will bring the economy out of the current crisis and put it on sound footing.

There's a lot to learn from this book and there are a lot of people who should read it.

If you are simply curious about the world around you, or just a concerned citizen, this book will fill you in on how the world works from an economic perspective. If you are a businessman, an investor, or thinking about buying a house, this book will enlighten you as to the business cycle and help you make the important financial decisions in your life with much greater understanding of how the economy will impact you.

If you are a reporter, this book will put you miles ahead of your colleagues in understanding, and in your ability to provide important insights to your readers.

And, if you are President Barack Obama, you need to read this book and get a clue, because your current advisers are providing you with advise that will only result in you driving the economy off a cliff.

In short, anyone who reads this book and truly MASTERS it, will be in the top 1% of people who really understand what happened to cause the current crisis, and in the top fraction of 1% of the population who understand how the business cycle really works.