According to Ben Bernanke, inflation is well under control, and if it isn’t he will correct it. He knows how or so he wants us to believe. Frankly, his ability [...]
Monetarist
To understand hyperinflation, this example from Art Cashin dealing with the price of a German loaf of bread is enlightening:
To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic….like a loaf of bread. (To keep things simple we’ll substitute dollars and cents in place of marks and pfennigs. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919 it was 26 cents. Now the fun begins.
In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed.
Many people know that the Supply of Money is related (generally with a lag) to price inflation. Few understand that all hyperinflations occur when the Demand for Money collapses. At some point in the process of inflating the supply of money, people recognize what is happening and begin to spend money faster (the “velocity” of money) increases) in order to avoid expected price increases.
When matters become especially obvious, no one wants to hold money. Vendors refuse to accept it and exchange goods only for other goods (barter). In monetarist terms, the velocity of money accelerates rapidly. At this point, the government or central bank has lost complete control. Changes to the money supply are dwarfed by changes in money demand. Hyperinflation is the result.
Jul 212011
John Mauldin presents this introduction to a paper by Lacy Hunt. The Hunt article is a good read for econophiles:
Long-time readers are familiar with the wisdom of Lacy Hunt. He is a regular feature of Outside the Box. He writes a quarterly piece for Hoisington Asset Management in Austin, and this is one of his better ones. Read it twice.
“While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern …”
As I write, Europe is starting to unravel. This is going to be much worse than 2008, at least as far as Europe is concerned, and odds are high that it will be very bad for the US. And the markets are still acting as if the problems in Europe can be resolved. The recent bank stress tests were a joke, as they assumed no Greek or Irish defaults. This simply can’t be. There is a banking crisis of massive proportions in our future.
As Lacy notes, we are testing the economic theories of three (I think von Mises should be added) dead white guys. The dominant theories are being shown to be wrong. The sooner we acknowledge that the better. But don’t hold your breath waiting for the major economic schools to come to grips with their failure.
This is a real problem, and there is just no way to avoid it. I wish I had more positive things to say.
Jun 072011
“No one saw it coming” is one of the great excuses used by the economics profession to rationalize our economic crisis. The statement is convenient, but demonstrably false. It would be correct if it were stated differently: “No Keynesian economist saw it coming.”
Rephrasing the statement in such a fashion makes it true but damning for the charlatans that promulgate Keynesian economics. Keynesianism is a fraud and always has been. It is not economics, but political manipulation of an economy. Politicians love it because its underlying thesis is that the economy, left alone, would stagnate at some level below full employment. This false claim is the basis for Statist government enabling government to grow bigger, take more from its citizens and involve itself into all aspects of peoples’ lives.
It is a convenient excuse to increase political power, plunder wealth and create economic and political dependencies amongst the citizenry. And it is all done out of need. To not expand government with all kinds of wacky programs would be economic malpractice according to Keynesian tenets. Politicians not doing exactly what they have always wanted to do would be doing a disservice to their country and citizens. What hogwash!
Too many trained economists are little more than idiot savants, capable of great statistical legerdemain and mathematical wizardry. They have little common sense and know nothing but what I like to call “Keynesian physics” — useless model building based on erroneous assumptions. Those who refuse to go along with the Keynesian myths are excluded from prestigious teaching positions, research grants, government employment and mainstream media attention. All of these barriers “persuade” honest scholars to become Statist economists because that it the best way to feed their families. Those who refuse are relegated to the minor leagues of economics.
The epistemology and positivism of the Keynesians is incorrect. Economics is a behavioral not a natural science. The basis for understanding is the individual, not some simplified and contradictory collection of aggregates to which causalities are falsely assumed. Ludwig von Mises and Frederich Hayek both understood this. They understood the cause and remedy for business cycles. Neither used “macro economics.” Interestingly, their approach provided reasonable understanding of business cycles while Keynesian economics still has no valid theory.
Human beings are not molecules that can be studied as such. Molecular behavior is simple. Given a few variables, molecules always behave the same way. Human behavior is complex. There are literally thousands, if not millions, of variables that affect an individual. Most of these are unknown and not measurable.
The notion that the price of an item is determined by only two variables — quantity supplied and quantity demanded — is an example of such simplicity. While these two variables are understandably very important, other variables affect the decision to sell or buy. Further, many key variables in human decisions are not measurable because they reside as expectations and other subjective judgments. Even when an economist believes he has found a “relationship,” it must be fallacious in the sense that he is looking at one or two variables. Human behavior is adaptive. Individual goals change, so past relationships amongst variables are rather meaningless, even if one were able to capture them.
Economists using the incorrect paradigm did not see the economic crisis coming. Now we hear all sorts of post-rationalizations about adding additional variables to their abstract models. This talk is not indicative of a science or a mature field. It is, at best, ad hoc tinkering designed to explain something after the fact. The reality is that these models can never have enough variables to make them proper. The presumption of being able to forecast outcomes is arrogance and beyond the limitations of behavioral science, the foundation of economics.
Virtually every economist who warned of the danger and imbalances in the economy were non-macro economists. Specifically, they were limited almost exclusively to the Austrian School of Economics where focus is on individual behavior and not aggregate variables. There were some non-economists, mostly financial types, that also saw the imbalances developing and warned of the danger.
The late Kurt Richebächer was an economist of the Austrian persuasion who saw the problems very early on. Here is Rick Ackerman’s intro to a reprint of an early interview with Dr. Richebächer:
Dr. Kurt Richebächer was one of the most visible and vocal proponents of Austrian School economics at the time of his death in 2007. Eight years earlier, at the height of the dot-com bubble, we interviewed him for the Sunday San Francisco Examiner. In retrospect, the economic problems that he believed threatened the global economy were small and relatively manageable back then. The same problems are of course still with us, and Richebächer undoubtedly would be appalled by the extent to which they have metastasized.
Although he spoke of a deflationary collapse in the interview, a close reading of his monthly newsletter from 1997-2002 reveals that he was conflicted on the subject. He used the word “deflation” only rarely during that period, and when he did, his logic became uncharacteristically muddy. Perhaps this is because, in the Austrian scheme of things, spectacular credit blowouts are not supposed to beget deflation, but rather, inflation. Arguably, if he were around today, he would still be uncertain as to which is likely to prevail when the economy finally collapses, as it must. The interview below appeared in November 1999 under the flippant headline “Economic Basics Predict Apocalypse”.
Read Mr. Ackerman’s full piece here.
 A Great Economist?American Thinker provides little-known background information on Irving Fisher, considered America’s first great economist. Fisher was a monetarist, but Stephen Mauzy points out how many of his ideas are apparent [...] |
 M2 Money Supply Beginning to IncreaseFor monetarists, increases in the money supply are generally believed to result in higher prices (inflation). Looking at the rate of increase from the late 1990s until today, there does [...] |
 Treasury Bonds Signaling Recovery or Armageddon?The Wall Street Journal commented in a puff piece on the recent rise in interest rates: Count us among the optimists who think this is good news, a sign that [...] |
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 QE, Beggar Thy Neighbor and InflationA must-watch interview with Jim Grant. Explains what QE is, what the intent of it is and what will be the result. Got Gold? Share/Save Download article as PDF |
 Year Ago – Monetarists vs KeynesiansOriginally posted: Sep 11 2009 The referenced article is a talk given at the Chicago Fed. It discusses the Monetarist vs. “Output-gappers” views on inflation and deflation. Monetarists are probably [...] |
 Bernanke’s PickleWhat a pickle Fed Chairman Ben Bernanke is in! Mr. Bernanke is on record for unequivocally stating that he knows how to avoid a deflationary outcome. He cavalierly dismissed any [...] |
 Ratcheting to RuinThe U.S. government moves closer to a debt death spiral. Arguably, we are already in the beginning phase of this spiral as this rather scary observation points out: The nation’s [...] |
The Great Oz er Fed Has Spoken - Go To The Bunker
"New" Economics is "Bad" Economics
Lacy Hunt on Economics
Free Markets Don't End Like This
Voodoo Economics or Japan Redux
Inflation
Commentary on Milton Friedman and An Invite for Responses
I have added my comments in blue. Towards the end, a series of actions that might be effective in turning the country around were proposed. I think his comments and expanding this list would be an interesting exercise for readers plus whatever other suggestions might be appropriate. A forum on this topic might be very useful for readers. especially with regard to your ideas of useful remedies.
Feel free to comment on this post accordingly. If there is enough interest, I will put up a discussion forum on the website where topics like this one can be started by me or readers and commented on by readers.
A forum could be started on a number of topics. Here are just a few topics where this community might be able to help each other:
These are merely a few suggestions. I am sure readers will be able to add many of their own. Together we may be able to become a trusted resource to each other.
Let’s me know of your interest. If there is some I will supply a forum for topics where people can ask questions, offer ideas or answer other’s question.
There are few books written on these topics. We have never had an impounding freight train barreling down at us in such a fashion. I never owned a gun until about a year ago. I think it prudent to have some protection, given what is happening in England and other parts of Europe and what should be expected in metropolitan areas in the country.
The reader’s inquiry was straightforward and dealt with Milton Friedman, not food, food supplies, water access, security etc. I tried to show how this reader comment could be made more informational for him and other readers by adding information that I knew. Below, may adds are in blue. Feel free to add you own comments in a different color.
Comments From Reader
If there is interest in helping each other in such a fashion, participate in this exercixe and report your interest. We can get full-fledged BB software that will provide great flexibility for responding to each other’s questions. Good way to help, to learn and to meet fellow readers. Let me know if you are interested.