Despite the fact that the fix has been in since the days of FDR, Bernanke’s press conference this week is a sure sign that Keynes is on the ropes.
And just in case you missed EconStories‘ “Fear the Boom and Bust” from last year…
April 28, 2011 • 8:42 PM 1
February 28, 2010 • 4:12 PM 1
In an essay published in 1942, Ludwig von Mises laments the public’s “widespread ignorance” of the social implications of inflation then proceeds to define and describe what those implications are. He explains the harm visited on creditors and points out that all of us, in one way or another, are creditors. He discusses the advantages and pitfalls of different hedging strategies. Moral and political effects are examined as are the downfalls of using inflation, as opposed to taxation, for government funding. All of these points are presented after describing three assumptions he makes of his readers; three assumptions that form the foundation of his discussion. The first being, that “everybody knows that inflation consists of a large increase in the available quantity of money and money substitutes such as bank credits.” Secondly, that “everybody…knows that a general rise of prices and wages is the unavoidable and inescapable result of inflation.” And finally, that “most people realize that when inflation is going on price control is a quite ineffective method of controlling prices and wages; at best, it is a temporary expedient to break or postpone the force of inflationary effects.” The point to note is that Mises assumed the reader understood the definition of inflation; its genesis – an increase in the quantity of money; its effects – an increase in prices; and what would not work to squelch it – price controls.
Less than nine years later, Mises spoke out against the temptation and trend of governments to use inflation as a means of funding government expenditures. Contrary to his essay just described, he no longer assumed that the public knew the correct and traditional definition of inflation, in fact, quite the opposite. He states, “What makes it possible for a government to increase its funds by inflation is the ignorance of the public. The people must ignore the fact that the government has chosen inflation as a fiscal system and plans to go on with inflation endlessly. It must ascribe the general rise in prices to other causes than to the policy of the government and must assume that prices will drop again in a not-too-distant future.” From this we see that in the span of less than nine years, Mises’s observation is that where in 1942 the public knew inflation was an increase in the money supply, in 1951 it did not; where in 1942 the public knew that price increases where the result of inflation, in 1951 it did not; and where in 1942 the public knew that in an inflation prices would continue to rise, in 1951 it did not. In fact, the assumption was that, somehow, prices would soon drop.
At the end of his talk, Mises takes time to warn of a “…reprehensible, even dangerous, semantic confusion…” that has overtaken the use of the word “inflation”. No longer do people use it to refer to the increase in the quantity of money, but rather it is used to describe the consequence of inflation, the rise of prices. This confusion thus leads to an atmosphere where one is not able to discuss the cause of the rise in prices as there is no longer a term to describe the cause of the rise in prices. Since it can not be discussed it can not be fought and those who claim to be fighting it, the government, are merely posing as inflation warriors, all the while only fighting the symptoms of inflation, not attacking “…the root of the evil”.
Ron Paul is not one who has been fooled. In a statement given on the the House floor last year, Paul clearly strikes at ‘”the root of the evil” and makes clear to all who will hear the fate that awaits those who live in an inflationary economy:
…Inflation facilitates deficits, needless wars and excessive welfare spending.
Debasing a currency is counterfeiting. It steals value from every dollar earned or saved. It robs the people and makes them poorer. It is the enemy of the working man. Inflation is the most vicious and regressive of all forms of taxation. It transfers wealth from the middle-class to the privileged rich. The economic chaos that results from a policy of central bank inflation inevitably leads to political instability and violence. It’s an ancient tool of all authoritarians. Inflating is never a benefit to freedom loving people. It destroys prosperity and feeds the fires of war. It is responsible for recessions and depressions. It’s deceptive, addictive and causes delusions of grandeur with regards to wealth and knowledge. Wealth cannot be achieved by creating money by fiat. It instead destroys wealth and it rewards the special interests…
Inflation has been used to pay for all wars and empires. And they all end badly. Inflationism and corporatism engenders protectionism and trade wars. It prompts scapegoating: blaming foreigners, illegal immigrants, ethnic minorities, and too often freedom itself for the predictable events and suffering that result.
December 26, 2009 • 3:03 PM 0
This is a book for anyone and everyone wanting to make sense of the economic turmoil of the last two years. At the outset, Day very clearly states that his purpose…
…is merely to consider how, after more than 200 years of refining the science of political economy, we arrived in the present situation, and to reflect upon where we are likely to go next. My hope is that it will provide you, the reader, with a rational context that will help you make more informed decisions as you face the difficult challenges that lie ahead. It will also help you put the economic news reported by the financial media in a more historical perspective.
On each point – how we got here, where we’re going, a rational context and a historical perspective – Day delivers; offering a penetrating analysis of three of the most reported, yet inaccurate, economic statistics (GDP, inflation and unemployment), a devastating critique of Keynesian and Monetarist thought, a clear and concise explanation of the Austrian school and its business cycle theory; then ties it all together in a sobering forecast for the future.
As for his conclusions, frankly, I hope he’s wrong. Unfortunately, I think he’s right.
December 8, 2009 • 8:31 PM 1
Letting Be is presented by LibertyisLearning and is an entry in The Fraser Institute Student Video Contest. Win or lose, and I’m hoping for a win, LibertyisLearning has produced an excellent, clear and concise explanation of inflation, it’s cause, it’s symptoms and it’s effects. The solution? Watch and learn.
November 13, 2009 • 6:45 AM 0
A new twist on a chilling phrase.
Last night I had the good fortune to attend a book launch for a new book entitled Spread the Wealth, authored by Mr. David R. Breuhan (The title is ingenious, sure to attract many of today’s coercive spreaders and spreadees). I’ll have more details on the event later. In the meantime, peruse the site and pick up the book. Mr. Breuhan offers a prescription for our economic ills. And you’re part of the medical team.
October 9, 2009 • 9:03 PM 0
I can’t help myself so back just for a moment.
Granted, the president can’t help that he won. Granted, his prize is the Nobel Peace Prize, not the Prize in Economics. And, granted, under the circumstances, he handled the situation well. Here’s hoping though, he’ll use this occasion to learn about past recipients of the Nobel prize and take to heart Friedrich A. Hayek’s lecture, The “Pretence of Knowledge”, and his acceptance speech, delivered, almost 35 years ago, upon his receipt of the 1974 Nobel Prize in Economics.
An expressed apprehension from his acceptance speech:
…is that the Nobel Prize [in Economics] confers on an individual an authority which in economics no man ought to possess.
This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence.
But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.
And a few nuggets from his lecture:
…I confess that I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false…
…In fact, in the case discussed, the very measures which the dominant “macroeconomic” theory has recommended as a remedy for unemployment — namely, the increase of aggregate demand — have become a cause of a very extensive misallocation of resources which is likely to make later large-scale unemployment inevitable. The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labor and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate — or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganization of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from reappearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate…
…To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.
September 13, 2009 • 7:17 AM 0
August 19, 2009 • 10:36 PM 0
Arrrggghhh! Where do we get these people?!
I read tonight in a local weekly paper this economic nugget about Cash for Clunkers from Candice Miller, a local Republican representative in Congress, “I think that, by anybody’s standards, this has been the best economic stimulus program that the government has enacted.” Later on she continues, “This is going to be a critical component of how we get out of this recession, especially in Michigan. Throughout our nation’s history, it has been auto sales that have pulled our country out of the recessions. Talk to any economist.” [emphasis added]
The article further states without quoting that she sees another upside – a goose to the state revenues through new license and registration fees and increased sales taxes. Now I feel better.
I repeat. Arrrggghhh! Where do we get these people?!
August 9, 2009 • 7:56 AM 0
June 17, 2009 • 10:21 PM 0
I started reading Socialism by Ludwig von Mises this past spring and am almost finished. Tonight I came across a passage that’s just too good not to share in its entirety. Note how prescient Mises was. Socialism was first published in 1922 so he’s writing sometime before then. The current ill health of the US economy and how it came to be so gives testimony to the accuracy of his analysis.
Socialism promised to fulfill our hopes for a more rational, more just world. And then came this book. Our hopes were dashed. “Socialism” told us that we had been looking for improvement in the wrong direction.
Now this from a section on inflation. In the broader discussion Mises is discussing the methods of destructionism, the inevitable destruction of capital that occurs as socialist policies are pursued. Inflation is but one of the policies. As you read, think in terms of the decades since the end of WWII, not just the last couple of years. Think not only of real estate bubbles but of the seventies, Greenspan, dot com bubbles and Y2K bubbles. (All emphasis is added.)
Inflation is the last word in destructionism. The Bolshevists, with their inimitable gift for rationalizing their resentments and interpreting defeats as victories, have represented their financial policy as an effort to abolish Capitalism by destroying the institution of money. But although inflation does indeed destroy Capitalism, it does not do away with private property. It effects great changes of fortune and income, it destroys the whole finely organized mechanism of production based on division of labour, it can cause a relapse into an economy without trade if the use of metal money or at least of barter trade is not maintained. But it cannot create anything, not even a socialist order of society.
By destroying the basis of reckoning values—the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly—inflation shakes the system of calculations in terms of money, the most important aid to economic action which thought has evolved. As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital. In the usual, and indeed the only possible, kind of capitalist book-keeping, inflation creates an illusion of profit where in reality there are only losses. As people start off from the nominal sum of the erstwhile cost price, they allow too little for depreciation on fixed capital, and since they take into account the apparent increases in the value of circulating capital as if these increases were real increases of value, they show profits where accounts in a stable currency would reveal losses. This is certainly not a means of abolishing the effects of an evil etatistic policy, of war and revolution; it merely hides them from the eye of the multitude. People talk of profits, they think they are living in a period of economic progress, and finally they even applaud the wise policy which apparently makes everyone richer.
But the moment inflation passes a certain point the picture changes. It begins to promote destructionism, not merely indirectly by disguising the effects of destructionist policy; it becomes in itself one of the most important tools of destructionism. It leads everyone to consume his fortune; it discourages saving, and thereby prevents the formation of fresh capital. It encourages the confiscatory policy of taxation. The depreciation of money raises the monetary expression of commodity values and this, reacting on the book values of changes in capital—which the tax administration regards as increases in income and capital—becomes a new legal justification for confiscation of part of the owners’ fortune. References to the apparently high profits which entrepreneurs can be shown to be making, on a calculation assuming that the value of money remains stable, offers an excellent means of stimulating popular frenzy. In this way, one can easily represent all entrepreneurial activity as profiteering, swindling, and parasitism. And the chaos which follows, the money system collapsing under the avalanche of continuous issues of additional notes, gives a favourable opportunity for completing the work of destruction.
The destructionist policy of interventionism and Socialism has plunged the world into great misery. Politicians are helpless in the face of the crisis they have conjured up. They cannot recommend any way out except more inflation or, as they call it now, reflation. Economic life is to be “cranked up again” by new bank credits (that is, by additional “circulation” credit) as the moderates demand, or by the issue of fresh government paper money, which is the more radical programme.
But increases in the quantity of money and fiduciary media will not enrich the world or build up what destructionism has torn down. Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up.
Remember, this was Mises published in 1922, not Paul from the 2008 primary season.