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jmherbener
ParticipantTake a look at Huerta de Soto’s book, Money, Banking Credit, and Economic Cycles. Chapters 5 and 6 covers the Austrian theory of the business cycle and chapter 7 critiques Keynesian and Monetarist explanations.
ParticipantAnderson provides the Austrian counter to the monetarist. Also, Bob Murphy addresses the monetarist argument directly in his Politically Incorrect Guide to the Great Depression.
Irving Fisher’s theory of debt deflation begins with the assumption that the economy somehow becomes over indebted. If one starts the analysis at the beginning and not in the middle of the sequence of events, then one sees that over indebtedness comes through a prior monetary inflation via credit expansion. The malinvestments that must be liquidated to set the economy back on the right track occur during the boom. The boom is unsustainable because the built up production structure fails to satisfy people’s time preferences. The financial correction with its debt defaults and bank deposit shrinkage is not the cause of the ensuing losses and reallocation of resources. The financial correction merely reveals the malinvestments and misallocations that were made during the boom.
On the economics of deflation, take a look at Guido Huelsmann’s book, Deflation and Liberty:
http://library.mises.org/books/J246rg%20Guido%20H252lsmann/Deflation%20and%20Liberty.pdf
Participant1. The money stock is money plus money substitutes. The money stock declined from 1930-1933, but the amount of cash or currency did not. The decline in the money stock came from a decline in bank deposits. People generally were trying to increase their liquidity, banks included as they built up excess reserves.
2. Yes, by cutting reserve requirements in half after WWI and “managing” the money stock to be counter-cyclical, the Fed created the conditions for the massive bank failures. By 1929, Banks were highly illiquid.
3. Yes, and the moral hazard problem was made worse by Glass-Steagall in 1932 and FDIC deposit insurance in 1933.
4. There is a demand to hold money, i.e., the general medium of exchange, and not just purchasing power, which could be held in any asset. The amount of money a person will hold to satisfy his preference will depend on its purchasing power. So, you are correct that if the government inflates the money stock and lowers its purchasing power that will stimulate the demand for money and make price inflation worse. This is the process that can lead to hyperinflation.
On the Great Depression, take a look at Benjamin Anderson, Economics and the Public Welfare:
http://library.mises.org/books/Benjamin%20Anderson/Economics%20and%20the%20Public%20Welfare.pdf
ParticipantAs far as I can tell, he did not predict any booms and busts. He constructed a model of the U.S. stock market using the data of the past. (According to his c.v., he didn’t take a position in financial until 2006 and the first paper on the stock market he lists is from 2004.) The model generates signals to buy and sell. His model gave a sell signal in the U.S. stock market late in May. Since then the stock market has corrected downward. In other words, his predictive model is just another technical analysis of the stock market. It is not a theory of the business cycle or based on a theory of the business cycle.
Here is his c.v.:
http://www.er.ethz.ch/people/sornette/CV_Sornette_2012.pdf
ABCT does not stipulate the practical manner in which people make forecasts. They could have visions or use technical analysis or fundamental analysis or any other method they deem worthy. But, whatever method they choose, it must generate superior results otherwise its practitioners will be eclipsed by those who adopt superior techniques.
ParticipantHe is a physicist who has taken to studying financial markets as complex systems.
http://www.er.ethz.ch/people/sornette
Here is one of his forays into modeling the stock market:
ParticipantThe post looks fine to me.
There are two drawbacks, however, in making an analogy to the ABCT. First, analogies are more persuasive if they move from the simpler, more familiar case to the more difficult, less familiar case. They help the reader apply what he can more easily see to what he can only dimly see. Your analogy moves from the more difficult to the easier. Second, the ABCT and student loan cases are dis-analogous in at least one respect. The business cycle is self reversing while government subsidies are not.
ParticipantIf your friend is saying that the overall extent of bigness of business in society is insensitive to government intervention because it merely shifts entrepreneurs from attending to their enterprises, in which case they would be bigger, to lobbying for intervention, in which case they would also be bigger, then I’d say he’s mistaken. The number of entrepreneurs in society is not fixed or even a fixed portion of the population, but responds to the configuration of people’s preferences and the objective features of the chosen techniques of production and management. Moreover, the self-selection process of the market means that the characteristics that make for superior entrepreneurs (anticipating consumer demands, etc.) and not the same as those that make for superior lobbyists (bribing, etc.).
ParticipantLike your other question about how high interest rate will go when the Fed tapers QE3, this question is a matter of judgment concerning the impact of the causal factors that theory identifies for us. Commentators have different judgments and will therefore have different answers to the question of the extent of mal-investment.
A few points are in order that concern theory and facts, however, and not judgment on this issue. First, interest rates are low now because demand for credit has collapsed, not because of Fed manipulation of the supply of credit. Everyone agrees that banks are not creating new credit, but holding excess reserves in the wake of the Fed’s expansion of its balance sheet. Therefore, Fed policy is not currently manipulating interest rates significantly. Second, the reason for the delayed recovery is the dearth of investment. Because capitalist-entrepreneurs are sitting on cash and not investing, they are not making mal-investments. It may even be the case that investment is currently insufficient to maintain the capital stock and therefore, we have been experiencing capital consumption. Third, the period of mal-investment occurred during the boom. Unlike during the bust, interest rates are low during the boom because the Fed is generating monetary inflation through bank credit expansion. Mal-investment is the result. Fourth, the size of a financial collapse alone does not determine the impact on the real economy. The financial collapse of 1920, for example, was the same size as the collapse of 1929, but was not followed by a depression. Other circumstances must combine with a financial collapse to generate a depression.
ParticipantArmed with economic theory, each of us can make a prediction about how high interest rates will go when the Fed stops QE3 by using our judgment as to the likely impact of the different causal factors. Since our judgments differ, we will make different quantitative predictions even if we accept the same theory of cause and effect.
Given that interest rates have nearly doubled since Bernanke hinted that the Fed might begin tapering QE3 by the end of the year, it seems that the effect will be large. But the reason, I think, is not because by tapering QE3 that monetary inflation through credit expansion will slow down. Instead, I think, the effect has been on the demand side in changing investor expectations. Because investors have now adjusted their investments to accommodate their changed expectations, when the Fed actually tapers QE3 there will be less effect at that time than there would have been had Bernanke not made his announcement.
ParticipantArbitrage brings all interest returns together as far as possible given differences among different types of investments, including uncertainty and maturity.
Monetary inflation through credit expansion has a two-fold effect on interest rates. The credit expansion increases the supply of credit which pushes interest rates lower. The monetary inflation reduces the purchasing power of money which pushes interest rates higher. These basic effects of monetary inflation and credit expansion on interest rates is complicated by changes in demand for credit and demand for money. For example, monetary inflation during the 1970s generated double-digit price inflation, in part, because money demand was falling while monetary inflation of similar magnitude recently has generated little price inflation, in part, because money demand has been rising.
ParticipantFor example, suppose investors view the credit worthiness of 10-year Treasury Securities and 10-year AAA Corporate Bonds the same and the interest rate on both is 2 percent. If the Fed cuts back its purchases of Treasuries their prices will fall and yields increase, say to 3 percent. Investors gain by shifting funds out of Corporate Bonds and into Treasuries. Their arbitrage activity will move the Corporate Bond rate up and the Treasury rate down until they are the same again, but at a higher level than the original 2 percent.
ParticipantIf a person is motivated to learn economics, he should aspire to progress as far as his interest and ability can take him. As everyone is unique in his interest and ability, a wide range of progress in learning economics will exist among different persons. I think all of us who have devoted some time and effort to learning economics have found at each step that we have been able to learn more readily from some authors rather than others. Progress, then, depends on reading widely to discover the authors who speak most effectively to a person at each step in the process of his learning.
Here are three introductory treatments of economics as a discipline:
David Gordon, An Introduction to Economic Reasoning:
http://library.mises.org/books/David%20Gordon/An%20Introduction%20to%20Economic%20Reasoning.pdf
Robert Murphy, Lessons for the Young Economist:
Shawn Ritenour, Foundations of Economics:
http://www.foundationsofeconomics.com/
If introductory treatments are too advanced, try monographs that focus on a few economics truths:
The classic is Henry Hazlitt, Economics in One Lesson:
http://library.mises.org/books/Henry%20Hazlitt/Economics%20in%20One%20Lesson.pdf
Another is The Incredible Bread Machine:
ParticipantYou are correct that government regulation is used by politically-connected businesses to hobble their competition. There is a large literature on this. Tom DiLorenzo has done a lot of work in this area.
http://www.lewrockwell.com/dilorenzo/dilorenzo173.html
The Fed is a massive cartelization device for banks. Murray Rothbard has written about this:
Bigness of business, however, is a red herring. The real issue is whether an enterprise is efficient or inefficient. Private enterprise is constrained by profit and loss to serve consumers efficiently. Government intervention allows enterprises to receive profit and avoid loss while not economizing resources for consumers.
ParticipantLike all exchange ratios in the market, interest rates are determined by demand and supply. So, to anticipate what would happen, one must conjecture about both sides of the market.
If the Fed quit buying MBS, their prices would fall and yields would increase. Private demand would likely fall because investors would attach a more realistic risk premium to them without the Fed’s support. There would be little incentive to arbitrage funds to other investments and so there interest rates would not be significantly affected.
If the Fed quit buying Treasuries, their prices would fall and yields would increase. Given that private investors did not reassess the credit worthiness of the securities, the difference in interest rates would generate arbitrage opportunities and therefore, change interest rates on other securities. Whether the effect would be large or small depends on the relative size of the Fed’s intervention. The average daily volume of trade in U.S. Treasuries in 2012 was $519 billion.
Of course, the above comments assume that banks do not change their credit creation as their reserves change.
ParticipantLudwig von Mises addresses the theory of such a case in his book, Theory of Money and Credit:
http://library.mises.org/books/Ludwig%20von%20Mises/The%20Theory%20of%20Money%20and%20Credit.pdf
The discussion is in Part Four Monetary Reconstruction, Chapter 3 The Return to Sound Money. Mises discusses both the large country case and the small country case in which a country unilaterally returns to the gold standard while other countries do not.
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