Tuesday, September 27, 2011

More Mish on the failure of Monetarists and Austrian economics

Clearly, the path forward in economic theory involves the incorporation of Minski's models of debt.  Unfortunately, the group that has a lot of insights to add otherwise, the Austrians, make themselves irrelevant with their doctrinal stances vis-a-vis the gold standard and constant ravings about "fiat money". 
I find it illuminating that even Mish is fed up with their illiteracy regarding real economics, as on almost every other measure, he is an ideologically pure Libertarian.  Read for example his recommendations at the end of the article quoted below.  Mish would essentially institute a Libertarian Utopia (canceling drug laws, wage laws, union powers, tariffs, foreign wars, etc). 
Mish also mentions the K-wave cycle, the long wave cycle of debt-caused depressions.  I would like to point out that the Jubilee cycle of debt cancellation would perfectly eliminate the K-wave cycle of debt depressions. 
Since even Mish highlights the fact that the problem is high debt levels, it is telling that he does not make the obvious call for debt cancellation.  All of his recommendations would work to get the economy going strong, but none of them would directly address the debt problem.  Basically, Mish's pure brand of Libertarianism prevents him from recommending the violation of any contracts, which most people think debt cancellation would involve (my Jubilee plan pays off debt payments through electronically-issued checks, in other words honoring the debt, not cancelling it).   
the rest is a quoting from Mish:
But what has occurred as a result of Fed and Government "solutions" again is a classic macro deleveraging cycle response - a devalued currency and negative real interest rates has driven investors into inflation hedge assets such as gold, oil, ag assets, etc. at the margin. As opposed to having achieved the stated goal of fostering employment growth, credit creation and raising aggregate demand, etc., Fed QE has essentially succeeded in raising the cost of living in a cycle characterized by generational labor market and direct wage pressure among the middle and lower class wealth demographic.
As discussed above, monetary stimulus negatively affects the real economy for the temporary benefit of the financial economy and Wall Street. The tradeoff was not worth it except through the perverted-eyes of Wall Street.

Telling action in bank stocks says the limits of helping Wall Street may have even run out.

Many point to excess reserves as a sign of future inflation. I point to excess reserves as a sign of failed Fed policy. Commentary from Austrian economists shows they fail to understand how credit even works.

The idea those excess reserves are going to pour into the economy in a 10-1 leveraged fashion is simply wrong. Banks do not lend when they have excess reserves. Banks lend when they have credit-worthy borrowers, provided they are not capital impaired.

It is time Austrian economists finally wake up to this simple economic truth.

Economists of all sorts stick to failed models.
  • The Monetarist currency cranks want more monetary stimulus even though it is counterproductive
  • The Keynesian clowns simply will not admit end-game constraints
  • The Austrians for the most part either ignore credit or incorporate failed models of credit expansion into their theories.

Each camp points the finger at the others as to why the others are wrong. Ironically, none of the camps seems to understand the combined mechanics of debt-deflation, deleveraging, and attitudes.

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