In Central Banks Puzzled as Global Inflation Hits Lowest Level Since 2009: Solving the Puzzle I stated: “It’s no mystery why central bankers are mystified: Collectively, they are economically illiterate fools engaged in Keynesian and Monetarist group think.”
Reader Jon wants to know what I do believe and if I have any links.
Specifically, Jon asked: “Mish, if you are not a Keynesian nor a monetarist, what theories do you believe and do you have links or references about them?”
I subscribe to the Austrian school of economics covered in points 1-4 and 8 below.
Reading List
- Economics for Real People by Gene Callahan
- Economics in One Lesson by Henry Hazlitt
- What Has Government Done With Our Money? by Murray N. Rothbard
- Case Against the Fed: Murray N. Rothbard
- Tomorrow’s Gold Marc Faber
- Capitalism For Kids: Growing Up To Be Your Own Boss by Carl Hess
- Debunking Modern Monetary Theory (MMT) & Understanding it First by Erik Zimerman
- An Introduction to Austrian Economics by Thomas C. Taylor
Items two, three, four, and eight are free downloads at mises.org. Item seven is a free website article.
Links 1, 5, and 6 go to Amazon. I get a tiny cut of the action out of Amazon’s pocket. If you prefer Amazon gets the full price, then remove my reference.
Tomorrow’s Gold is an investment book by Marc Faber, one of the best ever, but it is not about the question asked. The book appears to be out of print. The best option may be to buy a used copy.
MMT, Keynesian, Monetarism Fatal Flaws
MMT, Keynesian, and Monetarism all suffer from the same fatal flaw: They promise something for nothing, in various ways.
Brief Keynesian Rebuttal
The average 6th grader would immediately understand how absurd it is to pay people to dig ditches and other to fill the holes, but the average Keynesian believes such silliness.
The chief proponent of Keynesianism today is Paul Krugman. He believes that if you “prime the pump” economic activity feeds on itself and it becomes self-sustaining. Japan proves otherwise so do trillions of dollars in piled up US debt.
Neither Krugman, nor anyone else, has ever bothered to explain what happens when you stop paying people to dig ditches, but the result is obvious.
Brief Monetarist Rebuttal
The Monetarists believe if you cheapen money by flooding the world with it, there is a benefit. History shows that by the time access to money is readily available to the masses, major problems are at hand.
Ben Bernake and Janet Yellen, the former and current Fed chairs, are monetarists.
The results of 2000 and 2007 are in. The benefit was to the banks, the wealthy, and the political class first in line to get cheap money, at the expense of everyone else. Few people see today’s problem because the bubbles have not yet popped.
Brief MMT Rebuttal
MMT says government is different. It owes the money to itself and the debt can be canceled at will. in MMT theory, a benevolent government would spend the money wisely, cancel all the debt or pay interest to itself, and everyone will essentially live happily ever after.
I believe Ellen Brown falls into the MMT camp. So do many of those who propose a “free” guaranteed standard of living for everyone.
Erik Zimerman does a beautiful job in debunking MMT in the link provided above.
Greenspan on Free Handouts
Former Fed chairman Alan Greenspan offered a pertinent comment in January on free handouts and growth.
Alan Greenspan: “You can’t get growth going so long as entitlement expansion is anywhere near where it’s been recently. It’s eating up the sources of investment and the sources of growth and you can’t have it both ways. You cannot fund all of the entitlements that everybody wants and expect that you are going to get GDP growth out of that at three percent or more.”
Also in January, Greenspan said there was no stock market bubble. Just this week, Greenspan commented about bond bubbles. I offered this insight into Greenspan:
Bond Bubbles: The accuracy of Greenspan’s calls is inversely proportional to the number of people who believe them.https://t.co/RnLcSZMxHs
— Mike “Mish” Shedlock (@MishGEA) August 4, 2017
When Greenspan is widely ignored, as in his warning about entitlement spending, he is quite often correct.
Greenspan now says there is a bond bubble. Here is my complete reply: Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bub
Something for Nothing
Any economic theory that proposes paying people to do nothing, debt is not a problem because we owe it to ourselves, and/or there is some sort of overall economic benefit to rising prices is charlatan economics.
The average sixth grader understands it’s better to get two candy bars for a dollar instead of one, but the average Keynesian and Monetarist doesn’t.
Falling prices and higher standards of living go hand in hand as do higher productivity and falling prices.
It takes years of training to get someone to believe total economic nonsense, and that is precisely what academia provides.
Related Articles
- How Twisted Minds Function
- “Idiosyncratic and Transitory Factors” Holding Down Inflation: New Definition of Transitory
- Ellen Brown’s Certified Nutcase Proposal to “Save Illinois”
On deck is another round of destructive asset price deflation, brought about by Central banks who sponsor complete economic foolishness.
Addendum: Teacher Response
Excellent post, one of your best, Mish! I have only one correction: In my experience as a teacher, even 2d graders understand the absurdity of digging holes and filling them up! More proof that young kids are smarter than adults.
Mike “Mish” Shedlock
The me, the flaw in Austrian economics is the degree to which it depends on the gold standard. The problem there is that the supply of gold rises at 1-2% a year while the population growth and economic growth exceeds that.
The result is that gold becomes more expensive, and debts are paid with more expensive money over the term of the loan. Economic growth is retarded, and borrowers are punished. This underlied the gold v silver issue in the U.S. in the 19th century, and ultimately led to the creation of the Federal Reserve.
Aside from liquidity crunches and their subsequent sterilization, I think Friedman had it right when he suggested that the Fed expand money at the same rate as real economic growth, i.e. 3%.
Greenspan thought that an additional 2% inflation was appropriate, and I can’t argue with that. In any case, I think inflation, at the aggregate level, is always and everywhere a monetary phenomenon, and that discipline in the creation of money is fundamental to a correct economic policy in the long term.
Nearly any supply of gold is sufficient. Obviously zero isn’t. But nearly every ounce of gold ever mined still exists. That is sufficient supply even if mining stopped dead in the water tomorrow,
To my way of thinking, economic theories are “seasonal,” in the sense that nothing works all the time. They are all flawed, and the key is to understand the flaws. Keynesian economics basically works by having the government go into debt to stimulate demand. This works if demand is low, capacity is underutilized, and government can service the debt.
Supply side economics, which is really just as restatement of Say’s Law (“supply creates its own demand”) if cap-u is high and/or if the capacity itself is outdated or inefficient. In that case, government should reduce taxes and regulations, and let ‘er rip. Still, though, just as with Keynesian economics, government needs to have adequate debt servicing capacity because the incentives pretty much always don’t pay for themselves, notwithstanding Laffer’s cocktail napkin.
The underlying problem, as Greenspan and others have said, is that none of it can work in the absence of appropriate fiscal restraint and taxation levels. To me, that’s really the issue. The U.S. did the right thing in the ’30s and ’40s by priming the pump, and then paying down debt in the ’50s.
Same in the ’80s, when it primed the pump on the supply side, and then paid down debt (as a share of GDP) in the ’90s. Primed the pump again after the Panic of ’08, but never paid it down, and in fact did it again after ’20. It’s axiomatic — a basic of finance — that debt reduces operating flexibility. That’s the situation we are now in. Debt itself isn’t the problem, but rather the ability to service it.
We are already seeing it now, and we will see it to a much greater degree in the years ahead. It’s really not, to me, a problem with the economic theories themselves but rather with the alarming deterioration of basic financial discpline with not only government but increasingly throughout the economy.
To understand problems with economies, you have to understand exponents and exponential growth. As long as all money is created as debt, no matter who creates it, there will be an exponential rise in demand for money (at least at a rate of the average interest rate.) Because the money to pay interest is not created at the same time as creating the money, the money for interest payments must be borrowed and that is the primary driver of the demand for money. (This is most often borrowed not by the person owing the interest but by others who circulate the money back to the person paying the interest.)
This means the Austrian vision of a free market of banks creating multiple monies and the value of money being determined by the market is little different from the enslavement we have by regulated banks creating a single currency doing the same in a distorted market.
Modern Money Theory is wrong as well. If we define the money created by banks as economic money, then we can define the money created by government spending as financial money. Government spending creates financial money, but its circulation at the upper echelons saps economic money from circulation. Spending financial money requires conversion to economic money first. There are types of financial money other than treasury securities, but financial money circulation is mostly a process of churning. It doesn’t produce anything. It is economic money that produces things.
85% of the economy produces consumables (15% is durable goods). But in our current system, all the money that creates the GDP incurs debt. For a stable economy there must be at least enough money circulating that does not incur interest to produce the economic consumables.
The idea of the Fed creating money (an idea pounded on by Austrians) ignores the fact that it is just substituting economic money for financial money. Most of the economic money created in this process is used to facilitate the churning of that mixture of financial and economic money. Also, Fed creation of economic money is usually reversed within a short time period. Repos and Reverse Repos provide relatively short term additions and subtractions to the money supply and little of that enters the real economy.
I heard that Steve Keen now subscribes to the MMT point of view.
Ellen Brown, at least in her book, “Web of Debt,” does not subscribe to the MMT point of view. You probably came to that conclusion because, like MMT, she has determined that a government that creates its own money does not have a particular spending limit. But her reasoning is drastically different from MMT. MMT insists that all money MUST be debt. Her views are definitely not that.
None of the economic schools consider the creation of money as debt. Until they address that issue, none of them will provide viable economic advice. They may consider debt and debt ratios in their models, but that isn’t the same thing.
It is very simple, spend more than you earn and your net wealth decreases. Stated another way, if consumption exceeds wealth generation, your wealth decreases. In the economy our collective wealth must generate more income than we spend or our collective wealth decreases. Government spending is nearly 100% consumption even if a spending program is dubbed an investment. Consumption destroys wealth and the federal government is the largest culprit.
All the theories and their acronyms just confuse the issue to the advantage of those destroying our economy.
Whenever someone takes out a mortgage to buy a house, he’s spending more than he earns. The issue is whether he can service the debt.
– (Keynesian) economist Steve Keen has the best explanation for what’s going on in the economy. He is using theories developed by Hyman Minsky and (of course) Keynes. Keen and Minsky are both HARDCORE Keynesians. A LOT OF economists are “half baked” austrians and ignore the dynamics of “Demand and Supply”.
– A LOT OF people/economists fail to understand the math of capitalism and then draw the wrong conclusions. And this math is so surprisingly simple that even laymen can understand this math.
– Followers of the Austrian school are a bunch of nutters. They always blame for EVERYTHING bad happening in the economy (“rigging the economy”) but fail to understand the dynamics of the corporate sector and DEMAND dynamics of the “consumer”.
– “Monetarism” is a bunch of nonsense to justify the actions of the corporate sector and fails to incorporate the dynamics of DEMAND and therefore completely misses the “bigger picture”.
Austrian “school” is a misnomer. It’s a lot of folks that skipped Econ class.
Keen is brilliant, but he and the rest of even the liberal reformers are still analyzing only on the reductive and systemic level when the conceptual/paradigmatic level is where the real insites and breakthroughs are found.
All of the present theories are Dodo birds when one begins to actually see how the new paradigm concept is strategically applied. Thats what a paradigm is…an APPLIED idea that RESOLVES THE ANOMALIES OF OLD ORTHODOXIES AND IMPLEMENTS NEW BENEFITS. Historically every new paradigm is absurd because the new concept is long acculturated and is always in complete conceptual opposition to the old/current paradigm. Hence it is viewed as illogical. Example: the change from nomadic hunting and gathering to homesteading, urbanization and agriculture, i.e. nomadism vs homesteading and momentary gathering vs agriculture.
All present orthodoxies and even the cutting edge reforms of Keen etc. are erudite duncery compared to paradigmatic analysis. If we didn’t open ourselves up to such analysis we’d still be wandering hunters and gatherers.