Massive Blob Thinking or Why You Hated Economics Courses in College

Do you really want to know why you hated econ 101 class? It's because you realized the theories made no sense. The profs spin you around with a lot of whiz bang contradictions, throw in some Keynesian nonsense and then leave you off where you started.

WSJ's Kelly Evans attempts to mimic Keynesian econ 101 profs in her most recent column:

Fed chief Ben Bernanke sees little sign of inflation on the horizon. But U.S. households don't feel the same way.


Take the preliminary November consumer-sentiment index, produced by Reuters and the University of Michigan, due out Friday. It likely will show that households think prices will be about 2.7% higher in a year than they are today. That isn't exactly hyperinflation, but it is two-and-a-half times the current inflation rate.

That kind of gap is somewhat unusual. Typically, inflation expectations follow the behavior of actual inflation rates. That hasn't been the case this year. Inflation, as measured by the year-on-year change in the Labor Department's consumer-price index, has dropped from 2.7% in January to 1.1% in September. Yet households' expectations barely have budged.


One likely reason: food and energy costs. Barclays Capital notes that inflation expectations are most influenced by these two frequently purchased items. Prices at the pump average $2.86 nationwide, according to AAA, up from $2.65 a year ago. Meanwhile, the recent run-up in commodities like sugar, corn and wheat is gradually feeding through to store shelves and restaurant prices.


That is no small matter. What households and investors think about inflation can influence the actual outcome of price changes, which is why Federal Reserve policy makers like Mr. Bernanke follow the data zealously.

Right now, the Fed actually may be cheered rather than troubled by the persistence of higher inflation expectations. That is because it wants to boost inflation, which is running below its target. And consumers are more likely to spend, spurring economic growth, if they believe prices will be higher in a year.

But there is a major caveat: Consumers will spend only if they can afford to. Higher food and energy costs that aren't matched by income gains leave consumers with less to spend on other purchases and undercut efforts to stimulate the U.S. economy. That is the risk right now. Only 12% of consumers in the October sentiment survey expected their family incomes would be up more than prices over the next year.

Little wonder that sentiment overall fell to its lowest level since November 2009. The message from households isn't as inflationary as it first appears.

What Evans doesn't understand here is the desire to hold cash balances, which soared during the Great Recession. She also must have forgotten about QE2.

Prices can change based on the desire to hold cash balances, without changes in income. Evans seems to get this for a minute, in a Keynesian sort of way, but demolishes her own thinking on this in her next paragraph. She writes:

[The]Fed actually may be cheered rather than troubled by the persistence of higher inflation expectations. That is because it wants to boost inflation, which is running below its target. And consumers are more likely to spend, spurring economic growth, if they believe prices will be higher in a year.

But she then blows away this thinking as idiotic:

Consumers will spend only if they can afford to. Higher food and energy costs that aren't matched by income gains leave consumers with less to spend on other purchases and undercut efforts to stimulate the U.S. economy.

So she is basically saying that her paragraph about higher expectations is nutty and won't work.  This is just the start of this acid trip.


During periods of  high inflation expectations, people will have a much lower demand for cash relative to other goods. That is, if they think prices will go up and they will buy today rather than wait until tomorrow, thus keeping their cash balances low--and pushing prices up. This is what econometricians and other mathematical economists call velocity, which is really a distortion of the non-mathematical more precise term, desire to hold cash balances. (Expect Evans and other WSJ reporters to start babbling about climbing velocity in about six months.) Thus, contra Evans, overall inflation can climb without an increase in incomes--though incomes are likely to climb because of QE2.

(Changing desires to hold cash balances can also act to put downward pressure on prices, which is a period we are coming out of. Because of the Great Recession people were in fear, not knowing what was going to happen next, so they increased their demand to hold cash balances. This is really what Krugman's babbling about deflation is all about. The price economy adjusting to a greater demand to hold cash.)

In addition to her failure to understand the influence of the desire to hold cash balances and its impact on prices, Evans amazingly doesn't recognize the influence of QE2. With Bernanke blasting for weeks that QE2 was coming, a couple of people might actually think that inflation will be climbing and these people might also suspect that their rank on the totem pole is very low for getting a chunk of the new QE2 money. Thus their thinking might be, "Yeah, incomes are going to climb because of QE2, but it won't be mine."

Evans mass aggregation, typical of confused Keynesian thinking, lumps everyone into one massive blob. That's why she is confused about people thinking inflation will be higher but that those same people are thinking that their incomes will not climb. People know damn well that inflation is coming because of QE2, but they also know not to mass aggregate. They know the new QE2 will get out there, but they are not on Bernnake's Christmas list of those who will receive QE2 money.  In other words they are, correctly, not making the Evans error when she writes as though climbing incomes blanket everyone at the same time:

But there is a major caveat: Consumers will spend only if they can afford to. Higher food and energy costs that aren't matched by income gains leave consumers with less to spend on other purchases and undercut efforts to stimulate the U.S. economy. That is the risk right now. Only 12% of consumers in the October sentiment survey expected their family incomes would be up more than prices over the next year.

There is no caveat needed here. Consumers know prices are headed higher, but they also know they are not going to be the first to get that money. End of story.

Understanding this eliminates the confusion that Evans has as to why people can expect higher prices, but not higher incomes.

Bottom line, Evans is going to be very surprised about the huge uptick in inflation that is coming. The desire to hold cash is declining and Bernanke's QE2 is going to bomb the planet with hundreds of billions in new high powered money.

Her analysis will look as nutty as it sounds, given households are expecting higher inflation (My emphasis):

Fed chief Ben Bernanke sees little sign of inflation on the horizon. But U.S. households don't feel the same way.

Take the preliminary November consumer-sentiment index, produced by Reuters and the University of Michigan, due out Friday. It likely will show that households think prices will be about 2.7% higher in a year than they are today. That isn't exactly hyperinflation, but it is two-and-a-half times the current inflation rate....

The message from households isn't as inflationary as it first appears.

Confusion at WSJ on Fed Activities

On the day the Federal Reserve is likely to announce huge money printing under the code name "Quantitative Easing 2", WSJ is doing its best to keep the public as confused as WSJ, itself, appears to be.

WSJ reporter Kelly Evans, who once declared that Peter Boettke was "emerging as the intellectual standard-bearer for the Austrian school of economics...", reveals, today, some of her economic understanding that likely helped her reach the conclusion on Boettke.

She writes:

The Federal Reserve is widely expected on Wednesday to announce another bout of bond buying meant to stimulate the U.S. economy

What Kelly misses here is that the Fed is going into a complete new type of bond buying. It appears the Fed will be buying Treasury securities with maturities of 10 years or more in the secondary market. This has never been done before by the Fed. It is not "another bout of bond buying". The Fed in the passed has only bought short-term Treasury securities. Their special asset buying during the financial crisis was, as far as the Fed has disclosed, pretty much about mortgage backed securities---although long term in nature only an amateur would refer to them as bonds. A knowing MBS trader would nod at such a naive use of the term and think, "Boy, do I have a live one here."

In other words, Kelly is missing the essence of mad scientist Bernanke introducing a new "tool" into QE2, i.e., for the first time ever, the Fed is going to be buying Treasury securities with maturities of 10 years or longer.

From there Kelly goes on to tell us:

Additional asset purchases, a process known as "quantitative easing," are costly, risky and unlikely to have an immediate or major effect on growth in gross domestic product.

Here, we have confusion on several fronts. I have never, ever seen the word "costly" used with regard to Fed money printing. The Fed just prints the damn money (technically issuing an electronic credit). It isn't as though the Fed has a limit as to what they can print, or has to find the money somewhere. Using the word "costly" here makes little sense. (It's possible she means there is an inflation cost, though unlikely because of what comes next)  She next tells us that  QE2 is "risky". I hope here she means that there is a huge inflationary threat because of this money printing. We don't know for sure because instead of writing, "inflationary threat" she uses the word "risky", which means we don't know what the hell kind of risk she is talking about.

Finally, she tells us that it is "unlikely to have an immediate or major effect on growth in gross domestic product."

How she reaches this conclusion, she does not tells us. She just drops it out there. In truth, if the Fed prints enough money, it will be very inflationary, but GDP will look good damn fast. And $500 billion over a few months might just be enough to do the trick.

There's more confusion in the short six column piece, but you should get the picture from here. You aren't going to learn anything from WSJ about how the Fed is operating. In fact, it is almost dangerous to read their stuff.

Nothing Straightforward About Ben Bernanke (Despite what WSJ says)

WSJ's Kelly Evans is out with a piece today where she writes:

In the past, the Federal Reserve's efforts to stimulate the U.S. economy have been fairly straightforward.

This is the kind of misleading thinking that will confuse a lot of investors. Bernanke is as far from straightforward as you can get. As I have pointed out ad nauseum, he institutes new "tools" that get out of control and then he is forced to create new "tools" to deal with the situation. He now has created the "tool" of draining funds by allowing money markets to buy securities from the Fed, as a patch job for the excess reserves which exist because of an earlier new Bernanke "tool."

Keep in mind that there is over a trillion dollars sitting in excess reserves. No one knows, when, how fast or what will cause these reserves to come flying into the system. Straightforward? Hardly. You should never talk about striaghtforward when a trillion emerges out of nowhere and the Fed desperately creates even more tools to deal with this out of control tool.

Remarkably, Evans then goes on to analyze current money flows as though the current pre-QE2 flows will have anything to do with money flows when QE2 is launched:

The [Fed stimulation]process becomes much more fraught, however, when investors have other, more attractive assets—and other countries—to choose from.

Already, the protection against dollar debasement and inflation offered by commodities and precious metals is luring investors. So are the greater growth prospects of emerging markets. Emerging-market equity funds, including ETFs, have taken in nearly $60 billion year-to-date, according to EPFR Global. Global precious metals and commodity funds have added about $19 billion. U.S. equity funds, meanwhile, have seen $50 billion of outflows.

True there have been flows into emerging markets and precious metals. But this is BEFORE QE2. Does she really think QE2 is not going to reverse the outflow from the U.S. stock market?

What we are seeing now is crossflows--since there is no significant money printing. When QE2 comes, the game changes. Precious metals and emerging market strength will continue, but there won't be a this asset versus that asset situation, like we have now. There will be plenty of money to flow into all assets.

The real danger is not as Evans writes that:

Policy makers may find it tougher than expected to inflate this leaky balloon.

The real danger is the exact opposite that inflation will get entirely out of control.

Kelly Evans and The Gold Hater Need to Read EPJ More Carefully

WSJ reporter Kelly Evans retweets:

TheStalwart [The Gold Hater] Like I said, don't show your kids. And don't show @ wenzeleconomics! RT @terranovajoe: gold is down $33

On Sept 22, I wrote:

I expect gold and silver to be much more volatile as the strong price activity will attract many more short-term traders that will be in and out of the metal on a moments notice

I wrote on Sept 27:

The long term prospects for gold are very bullish. (However, gold buyers must be cautious of short-term pullbacks and be prepared to hold through such downdrafts.)

In the Oct 15, EPJ Daily Alert, I wrote:

Gold and silver obviously have to be at the core of your portfolio, at
least 25% of your money should be there. There will be short term
pullbacks, but you just have to grin and bear them. It is much to
dangerous not to be positioned strongly in these metals.

Kids, if you don't understand that pullbacks occur after huge runs like gold has had, especially since the Fed hasn't started with QE2, yet, you may need to go back to covering and watching paint dry. That'll stay in one place for you.

Peter Boettke

Whoa! If this were the New York Post, I'd be running a Peter Boettke picture on the front page for the second day in a row.

I received emails from all sides and very heavy traffic to yesterday's post on Boettke. Who would think that an intra-school academic battle would generate such interest?

Yesterday, I couldn't even get away from the story at lunch.  I had lunch with a top Congressional researcher and the first thing he brought up was that post.

For the record, I received emails from many former and present Boettke students who assured me that Boettke does use the texts of Mises and Rothbard in his classes.

Boettke, himself, emailed me, questioning some of the points I made in my post.  I asked permission to publish his email, but he declined stating that he did not want to start a flame war.

Kelly Evans, the reporter who profiled Boettke, emailed and said:

 By the way, your post on the piece is spot-on – there is much, much more I could/should have added but in Pete’s defense I’ll just mention this: one of his favorite quips to students is that they should “love Mises to pieces”

David Kramer weighed in with this piece. Most important in Kramer's comment is that he points out that in the WSJ interview Boettke states:

“The Fed, he [Boettke] says, should be to make money “as neutral as possible, like the rule of law, which never favors one party over the other.”

I'm not sure what Pete was thinking here. I would think that almost any Austrian would argue that money is never "neutral". Indeed, the entire basis for the Austrian Business Cycle Theory is that money is not neutral and that central bank interference distorts the structure of the economy. The best interpretation of this for Pete is that he did not choose his words carefully, especially for a professor of economics. The less charitable interpretation is, well, not a charitable view at all.

Thomas DiLorenzo also weighed in with a post, Lying About LewRockwell.com and the Mises Institute, following a comment made at my original post by Brian Bedient.

Finally, several people emailed this earlier Joe Salerno piece centering on Boettke.

Kelly Evans, Again

Last week I told you to keep an eye on WSJ journalist Kelly Evans, after her focus on money supply. This weekend WSJ published her story on Austrian School economist, Peter Boettke. Evans is clearly a truth seeker. You are going to find few mainstream journalists that are willing, and have the courage, to step outside the very clearly marked borders of what is to be written about in the establishment world. WSJ may have a real reporter on its hands. So kudos to Evans!




Her profile of Pete is right on. It catches the essence of the man. As one guy told me, Pete "is a very hard worker, which singles him out in academia!"

That said, the one point in Evans piece that might raise some eyebrows is the reference to Pete and his "emerging as the intellectual standard-bearer for the Austrian school of economics..."

It would probably be best to describe Pete as the standard-bearer of the Uptight Wing of the Austrian School of Economics. The Uptights tend to promote the work of Noble Prize winning economist Friedrich Hayek, over the work of the Austrian economists Ludwig von Mises and Murray Rothbard.

Disscussing Hayek but ignoring Mises is something akin to discussing Scottie Pippen when talking about the championship years of the Chicago Bulls and not mentioning Michael Jordan. Nothing wrong with Pippen, but Jordan was "The Man."

In economics, there's nothing wrong with promoting the work of Hayek, in general he was a great economist. But "The Man" is Ludwig von Mises. The Uptights tend to push Mises down the memory hole because according to them he was "too stubborn." Translation: He was a man of principle in the face of severe establishment pressure to bend.

Notice there is no mention of Mises in the profile on Boettke.

There also seems to be a new move by the Uptights to distance themselves from the term "Austrian School." Boettke appears to be a key leader in this movement. For example, Boettke wrote:

As of January 1, 2010, we are changing our name to "Coordination Problem". This name change is symbolic as well as substantive. The term "Austrian economics" has become as much a hindrance to the advancement of thought as a convenient shorthand to signal certain methodological and analytical presumptions. We started this blog with a clear purpose to emphasize ongoing research in the scientific literature, and developments in higher education as related to economics and political economy. As a group we are committed to methodological individualism, market process theory, institutional analysis, and spontaneous order theorizing. And while we do not shy away from policy discussions, we do not identify with any political party or specific political movement.

As an experiment, over the past six months we have been tracking the use of the term Austrian economics in the news and in the blogosphere. Less systematically, we have also been listening carefully to the use of the term among fellow professional economists and what they think the label means. The results do not fit our intention. Google alert, for example, inevitably points to financial advice or libertarian politics, rarely to the research paradigm of F. A. Hayek, never to the scholarship of Israel Kirzner. Mises is often mentioned, but Mises the ideological symbol, not Mises the analytical economist. The "Austrian" theory of the business cycle is mentioned, but only in relationship to anti-fed politics and hard money advocacy, and never as an ongoing research program among professional economists.

These trends are not recent, but have been constant throughout our respective careers. We have always been among those who attempted to offer resistance to this use of the term. It has become evident to us that our efforts have been futile. Rather than resist the pure ideological identification, we are choosing to devote our efforts elsewhere. The name Austrian economics has been lost as a focal point for a tradition of economic scholarship, and is now a focal point for something else. We have to let it go.

Thus, it is somewhat ironic that a member of the Uptights has been identified as the standard-bearer of Austrian economics. Evans even seems to be a bit confused about all this since she writes in the profile:

The resurgence of Austrian economics does have its hazards, Mr. Boettke says. The antigovernment fervor on cable-television shows and the Internet may have popularized its theories, but it also "reinforces the idea to critics that these are crackpot ideas," he said. He has tried to distance himself from conspiracy theorists and even dropped "Austrian" from the name of his blog. But he hasn't yet thought of a better term.

Talk about cable-television fervor. A mention of Hayek's book, The Road to Serfdom, by the curious, one step in the insane asylum,  Glenn Beck, has sent the book to the top of best seller lists. And an even deeper reading of Hayek is being done by strippers.

The strippers are even reading Hayek's much more scholarly The Fatal Conceit.There has been no posting on Pete's blog as to how the Uptights should deal with these latest developments around Hayek.

In addition to the Uptights tendency to attempt to keep Mises and Rothbard stuffed down the memory hole. Many of the Uptights have wandered off the reservation with regard to Austrian methodology. The discussion on methodology is beyond the scope of this post, so I direct you to the paper by David Gordon on the subject. Gordon should be considered a kung fu master of the "Hard Core" Wing of the Austrian School. He has no fear. He will walk down dark allies, speak amongst gold bugs, make paths through Glenn Beck rallies and school curious strippers, and at all times, speak of the wisdom of not only Hayek, but Mises and Rothbard, as well.

In any case, congratulations to Pete. He is  a good guy. I'm not sure what texts he uses in his courses, but I hope his students are secretly holding discussion groups around such books as  Ludwig von Mises' Human Action and Murray Rothbard's Man, Economy and State. And that they occasionally cruise, Mises.org.

Robert Wenzel
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Kelly Evans On Watching the Money Supply

Sometimes I think the only person that makes any sense at WSJ is Kelly Evans. Read her stories, ignore everyone else, and you will get a decent picture of the economy.

Kelly has a nice piece about money supply in today's WSJ:

What isn't signaling deflation these days? Perhaps this: Despite the weakening economy, the U.S. money supply has been growing again.

The nation's money stock, which includes currency plus bank deposits and households' money-market fund holdings, grew to about $8.64 trillion as of Aug. 9, from $8.48 trillion at the start of the year, according to the Federal Reserve.

And the increase has largely taken place during the past four months. The 13-week average, which smoothes out weekly volatility, has risen every week since May 3.

On Thursday, the Fed will release its latest weekly tally of the money supply, or "M2." Although the figure rarely makes headlines, the money supply's behavior is critical to the economic outlook. It is tough to sustain economic growth when banks, which transmit money from the Fed to the broader economy, aren't lending and the money stock isn't growing...

While this is progress, it may prove fleeting. The money-supply growth seen so far may be tapering off. M2 grew by an average $7 billion a week in the 13 weeks through Aug. 9, down from $11 billion on average in mid-July.

Kelly also gets a nice quote out of Anthony Crescenzi as she explains excess reserves:

The Fed's survey of senior loan officers, for example, found lending standards eased during the second quarter both for households and businesses. In other words, banks may be starting to put a sliver of their $1 trillion of excess reserves to work.

"I've always viewed the reserves as this mass of fuel, but the match is miles away from it," Pimco strategist Anthony Crescenzi says. "We would say that the match has moved a little closer to the fuel."

Kelly's focus on money supply is spot on, although when looking at money supply growth it is best to look at money supply growth rates rather than absolute numbers. She is looking at the right data. But money growth rates are under 5%, and nothing is going to get the economy into another pseudo boom unless growth is closer to 10%, so we have a long way to go before any short-term heat up in inflation.

Further, while watching money supply growth is very important, and it will get the economy going with another round of a Fed money induced manipulation of the economy, Kelly does call this "progress".

The only thing at this point that I would consider progress is if Kelly picks up a copy of the Mystery of Banking by Murray Rothbard so that she can understand why no Fed money manipulated growth is required and that the economy will do just with a stable no growth money supply.