Archive for the Austrian Economics Category

Permanent Keynesian Unemployment

Posted in Austrian Economics, Economy, Unemployment on December 30, 2011 by JT

hroughout the West, unemployment remains stubbornly high. Unemployment in these European nations ranges from 8.5% in Italy to over 20% in Spain.

For Europe as a whole, the figure is 10.3%. What is revealing is this: ever since 1995, it has been above 9% most of the time. Only in February 2008 did it fall to 7.3%. For workers under age 25, the figures are much worse. A generation of educated college graduates has become a lost generation.

Yet as the chart reveals, a few countries are doing far better. Netherlands, Austria, and Germany have rates from about 4.5% to 6.5%. These are nations noted for their comparative frugality.

For Europe as a whole, it has been 40 years of unemployment. It the 1960s, European employment was high. This changed in the 1970s. Keynesian economists seem baffled by this. Keynesian policies of government deficits were supposed to end unemployment. They haven’t in Europe.

The chart for the United States since 1965 is revealing. The unemployment rate climbs in recessions, then falls into the 4% to 6% range. Not this time. Since 2008, the rate has soared and has refused to come down. Use the interactive chart to select a base year.

All this is to say that the Keynesian system is unable to explain why unemployment should persist. The Keynesian tool kit has been available to national governments. The political leaders are disciples of Keynesianism. Their advisors are Keynesians. Yet the prescription is no longer working. The U.S. government has run three consecutive years of trillion-dollar-plus deficits. They have not worked to bring down the unemployment rate.

This raises a pair of questions. First, with respect to economic theory, why isn’t the policy prescription working? Second, historical: When a theory ceases to explain events, why won’t it be abandoned by a younger generation of theorists?

These two questions faced neo-classical economists in 1936. They could not answer either of them. They lost the war for the minds of the next generations.

KEYNES’ REVOLUTION

In 1936, Macmillan published John Maynard Keynes’ book, The General Theory of Employment, Interest, and Money. The book was an attack on the free market’s ability to clear itself of unsold goods, including “labor goods,” by means of downward price adjustments.

The answer to this issue had been provided two years earlier in a book also published by Macmillan and written by the rising economic star, Lionel Robbins. Its title: The Great Depression. It was written from an Austrian School approach. Robbins had studied informally with Ludwig von Mises in Vienna. Keynes’ question was answered again in 1937 by another book published by Macmillan, Banking and the Business Cycle, by three economists. It also was written from an Austrian outlook. So, the big winner in all this was Macmillan.

Keynes’ book became dominant. Younger economists adopted it. The other two books were forgotten by 1940. Within two decades, the modified Keynesianism of Paul Samuelson was dominant in Anglo-American academia. It remains dominant today.

The heart of Keynes’ thesis is this: downward price flexibility does not clear markets, including the capital goods markets. Classical economics had taught that the competitive pressures of the free market will lead to falling prices and decreased unemployment. The rule was this: “At a lower price, more is demanded.” This includes labor.

The Great Depression by 1936 seemed to refute the classical economists’ theory. Because this theory of causation was central to economics from Adam Smith to the Great Depression, the persisting unemployment seemed to refute this fundamental tenet of free market economic theory. Thus, the profession was waiting for a new theory of free market pricing. Keynes supplied this. The theory was wrong, but it had a ready market.

Keynes recommended what every Western government had been doing since 1930: run deficits. His solution was more of the same: larger deficits and more government employment.

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via Permanent Keynesian Unemployment – GoldSeek.com.

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International Asset Protection Expert Mark Nestmann interviewed by Simon Black of Sovereign Man

Posted in Asset Protection, Austrian Economics, Debt Collapse on December 7, 2011 by JT

Podcast

via mark.nestmann_on_2019EFC9F.mp3 (audio/mpeg Object).

Doug Casey talks to James Turk

Posted in Austrian Economics, Debt Collapse, Gold, Silver on November 15, 2011 by JT

Two of my favorite precious metals analysts, have an informative chat on the state of the economy and the PM’s markets.  JT

 

In this video, Doug Casey, founder and chairman of Casey Research Institute, talks to the GoldMoney Foundation’s James Turk about the greater depression that is facing the developed world. In Casey’s view, finding intriguing investment opportunities is difficult at the moment, owing to the dislocations affecting economies as a result of central banks’ money printing efforts. He does however think that tangible assets such as precious metals, land and fine art remain the best options available at the moment.

In stark contrast, Casey is extremely downbeat on bonds and the US dollar. He thinks that given the incredible levels that bond prices have risen to as a result of panicked safe-haven buying by hedge funds, they represent an excellent shorting opportunity for speculators.

Turk and Casey also discuss the opportunities to be had in mining shares, though Doug also points out the significant risks that mining companies face – relating to political pressure from politicians and environmentalists. He says that investors need to be aware of these risks, but remains bullish on junior gold and silver producers.

Casey and Turk also discuss whether or not technological advances will ever gold obsolete as a potential form of money and store of value. Casey points out that according to Aristotle’s definition of good money, gold will always remain the best form of money. In his words: “gold is uniquely suitable for use as money”. Viewers can subscribe to free “Conversation with Casey” at http://www.caseyresearch.com. This interview was recorded in Sydney, Australia in October 2011.

Click below to watch the interview.

via Doug Casey talks to James Turk.

Blame Government, Not Greed – and, Please, Ignore Central Banking

Posted in Austrian Economics, Debt Collapse, Politics on October 14, 2011 by JT

Friday, October 14, 2011 – by Staff Report

There is no mystery where the Occupy Wall Street movement came from: It is an offspring of the same false narrative about the causes of the financial crisis that exculpated the government and brought us the Dodd-Frank Act. According to this story, the financial crisis and ensuing deep recession was caused by a reckless private sector driven by greed and insufficiently regulated. It is no wonder that people who hear this tale repeated endlessly in the media turn on Wall Street to express their frustration with the current conditions in the economy. Their anger should be directed at those who developed and supported the federal government’s housing policies that were responsible for the financial crisis. – Wall Street Journal

Dominant Social Theme: Look here, look here … It’s government policies, see! Don’t look THERE. Don’t look at central banking. Look away from there. Look here … at government.

Free-Market Analysis: Peter Wallison, a senior fellow at the American Enterprise Institute and member of the Financial Crisis Inquiry Commission has had a high profile of late, publishing several articles in the Wall Street Journal (see excerpt above) blaming government rather than the private sector for the 2008 meltdown.

When the Financial Crisis Inquiry Commission (FCIC), he tells us, reported in January that the 2008 crisis was caused by “lax regulation, greed on Wall Street and faulty risk management at banks and other financial firms, few were surprised.”

Wallison differs. The crisis wasn’t the fault of the private sector, he writes. It was the fault of the government. Unfortunately, when Wallison states it was the government’s fault, he has a fairly specific idea about “government.” His government analysis seems to leave out the leading cause of the disaster – central banking policies.

It is central banking’s money creation and low interest rates that created the fuel for this last catastrophic bust that has – evidently and obviously – virtually ended the dollar reserve system. But that’s not Wallison’s emphasis.

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via The Daily Bell – Blame Government, Not Greed – and, Please, Ignore Central Banking.

The China Bust: Tic Toc – Kel Kelly

Posted in Austrian Economics, Debt Collapse on October 10, 2011 by JT

China is in the process of allowing its currency to rise. The reason for this is to address the worsening inflation rates in the country. Allowing the yuan to rise will indeed stop, or slow, inflation, but the way this fix works is not the way that is usually assumed. Neither will the effects of this policy be what most observers assume, i.e., just milder inflation. Instead, it will be an outright economic bust.

This article explains the real story behind the commonly espoused explanations regarding the taming of China’s inflation. It also breaks down many of the peripheral issues on the topic that are regularly discussed in the press, and exposes the false theories associated with these issues.

Currencies and Prices

In explaining how a rising currency will help tame inflation, most pundits relay that revaluing a currency to a higher price will cause import prices to be cheaper, thereby lowering domestic prices. For example, Credit Agricole CIB economist Dariusz Kowalczyk stated,

Policymakers have sent a clear message that currency appreciation will be used as a tool to counter imported inflation [due to near-record global prices for oil and other commodities].

Similarly, Bloomberg news reported that

Chinese officials may also seek to speed up gains in the currency, also known as the renminbi, to fight inflation, lowering the cost of imported U.S. goods such as Boeing Co. aircraft and Microsoft Corp. software.

The truth is that there is no such thing as importing or exporting inflation, because each country or currency area has its own individual currency, which is separate from another region’s currency. Prices within a particular currency area can rise only when that particular currency is inflated. (A rare exception is when other currencies also circulate within the same currency area, and an increase in the quantity of the other currencies causes prices to rise in that currency. But even in this case, the depreciating currency will likely soon stop circulating as it will be shunned for the stronger currency.)

But currency changes can indeed affect prices by way of changes in the supply of goods. A country whose currency is artificially undervalued — such as China — will artificially export more and import less. If the currency is allowed to rise towards the market exchange rate, it will begin to export less and import more.

All else being equal, a higher-priced currency will indeed result in a lowered price of imported goods. When imported goods cost less, consumers have more money to spend on domestic goods; purchasing power increases. Or, if the amount saved from spending less on imports is spent on acquiring greater amounts of the imported goods, there will be less demand for domestic goods, causing domestic prices to be lower. In either case, what has lowered prices is a stronger currency.

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via The China Bust: Tic Toc – Kel Kelly – Mises Daily.

Doug Casey on the Continuance of the Greater Depression and the Brighter Prospects for Gold

Posted in Austrian Economics, Debt Collapse, Economy, Gold on October 4, 2011 by JT

The Daily Bell is pleased to present an exclusive interview with Doug Casey (left).

Introduction: Doug Casey has appeared on hundreds of radio and TV shows, and has been the subject of articles in People, US, Time, Forbes, The Washington Post and numerous other publications. For nearly three decades, Doug Casey and his team have been correctly predicting major budding trends in the overall economy and commodity markets.

Daily Bell: Welcome, Doug. Let’s jump right in. Are you still convinced we are heading into a “Greater Depression”?

Doug Casey: Yes. There is no question in my mind about that. Governments all over the world have created trillions of currency units since 2007 in the mistaken idea that it would create prosperity. The Americans – but also the Europeans, the Chinese and others – have papered things over for the short run mainly by inflating the stock markets, artificially depressing interest rates, and slowing the fall of the real estate market. All that extra currency has made people think they’re richer than they are, and has encouraged extra consumption – which is a large part of the problem. Now they’re out of bullets.

We are coming out of the eye of the hurricane and it’s going to be much, much more serious than it was in 2007, 2008 and 2009. That’s because all those currency units they created are causing tremendous price rises on the retail level. It’s going to be devastating for the average guy.

Daily Bell: How long do you expect it will take before there is a complete breakdown in confidence of the US dollar?

Doug Casey: It’s happening right now. The Chinese – or at least their central bank – have more US dollars than anybody else, and they want to get rid of them. They are trying to offload those dollars, for instance in Africa, to get rid of them for real wealth. Nearly everybody in the world feels this way. The new deals that they cut, with the Iranians and the Argentines for instance, are almost like barter deals. Nobody wants to use the paper currency of an unreliable third party. The US dollar is like an Old Maid card; nobody wants to get stuck holding it.

I think in five years the dollar will have lost its reserve status completely. It may be more like two or three years. I hate to put such a near-term time frame on something that’s so momentous in size. But I don’t see any way out.

Daily Bell: Will there be accompanying civil unrest – rioting, looting and assorted acts of criminal behavior?

Doug Casey: Almost certainly. I think the riots we have seen recently in London, the various flash mobs we have seen around the US, and even the rioting that happened in Vancouver, are just an overture. When people don’t have jobs – and actual unemployment in the US is running at over 20% if it is calculated the same way it was 30 years ago – they become very unhappy, while they have lots of time on their hands. Combine that with the fact a vastly higher number of people live in cities than was the case in the ’30s – trouble always arises from cities. Combine that with skyrocketing inflation and a generally collectivist/statist psychology on the part of all segments of the population, and the result is inevitable. Living in a big city, or even a suburb, impresses me as a mistake.

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via The Daily Bell – Doug Casey on the Continuance of the Greater Depression and the Brighter Prospects for Gold.

On the Recent Gold Pullback

Posted in Austrian Economics, Federal Reserve, Gold, Inflation on October 3, 2011 by JT

The past couple weeks have seen a strong pullback in both commodity prices and stocks. Gold fell sharply off its peak after soaring just past $1,900. Volatility in commodity, currency, and equity markets has been very high recently, and these short-term price movements have Wall Street pundits in an uproar.

As gold prices soared, many advisors recommended investing in the yellow metal with appeals to the “bandwagon effect”. A rising price, they argued, indicated changing sentiment, and thus future appreciation. For those who bought on this reasoning, a falling price is a bad omen.

In addition, for a while, gold prices were rising even as stock prices were falling. As a result, some investors bought gold to hedge stock market risk. When gold eventually followed equity prices lower, these trades were unwound.

But as my readers know, following the crowd has never been the reason to buy gold. After all, that same logic would have recommended buying a house in Phoenix five years ago. Since the fundamentals still point to gold’s long-term viability, our phones have been ringing off the hook with customers smartly seeking to take advantage of the dip.

UNCHANGING FUNDAMENTALS

It’s important to understand the fundamental reasons for owning gold, and those reasons have not changed. The US government embarked on a decades-long spending spree of historic proportions. To finance the resulting debt, the Federal Reserve is printing money furiously. Because most every central bank governor appears indoctrinated in the Keynesian economic philosophy, foreign central banks are simultaneously printing euros, yen, francs, yuan, and pounds to “keep up.” Of course, this competitive devaluation actually represents countries shooting themselves in the foot.

Continue reading:

via Onthe Recent Gold Pullback.

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