Friday, 8 July 2011

Keynesian Reality vs Austrian Fantasy

The current crisis in our global economy emerged for reasons highly divergent from Austrian school type thinking. Economics is a very dismal science lacking experimental rigor. The Austrian school goes even further by largely abandoning even mathematical and stastical rigor. Anything goes then!



Here are the passive ingredients of the Austrian recipe:
  1. Allow liquidation of bankrupt firms and debt (no bailouts)
  2. Allow prices to fall (no monetary inflation)
  3. Do not prop up employment (no stimulus)
  4. Give no assurances against failure (no nationalizations of GSEs or expanding FDIC coverage)
  5. Do not subsidize unemployment (no extending of unemployment insurance)
  6. Do not discourage "hoarding," i.e., saving
This recipe will produce the quickest possible recovery and minimize the magnitude of economic pain.
For the economy to be efficient, we have to be paying the right price for a goods, and that correct price might be higher as well as lower: What happens when the prices are skewed up and down because of hysteria? Hysteria under valued UK and US banking shares as evidenced by recovery.
Fear of job losses changes behaviour and encourages hoarding. Hoarding reduces the velocity of money, GDP = Velocity of Money x Money Supply
These nutters would simultaneously restrict the money supply by boosting interest rates whilst round house kicking the economy by restricting the velocity of money through fear compared to more interventionist policies.
Their ideas are to ram the economy so hard and fast into the ground that it bounces. 

The housing bubble peaked in July 2005. Private investment, a leading indicator of the economy,peaked at the end of 2006. As worsening conditions in the home building industry spread, the economy stumbled in late 2006 and again in late 2007 before falling into clear depression in 2008. The size and scope of the Keynesian policy remedies employed since late 2007 have been unprecedented. With the renaissance of Keynesian economics we can only conclude that the preconditions for a new super cycle have been established, and that if the policies are not reversed we face many years of depressed economic conditions.

The austrian school is absolutely nuts and incapable of joined up thinking: They have this bizarre concept of 'artificially low' interest rates. The interest rates are what the market is setting, the lenders will lend at a rate that 'seems' sensible. Which is in any case, significantly above the central bank rates. The market sets the rate partly influenced by central bank, but mainly influenced by the supply of credit to institutional lenders.

The Austrian school which thinks we should have high interest rates ignores the consequences: High interest rates means strong currencies. Which means worsening trade balance with china. And it is chinas huge trade surplus which drove the supply of cheap credit to lenders in the first place.

They're waving their arms about trying to find some credible reason to be ideologically valid. Making incorrect points about the credit crunch. They have ignored the trade problem, and have ignored the needle which burst the bubble - high energy prices.

my advice, ignore them and go for a super Keynesian policy instead. Possibly combined with issuing new currencies to increase barriers to trade - in order to be better structure the economy

Disqus for A New Red Dawn