The ever-interesting Eclectic Econoclast has a link to an article by the Marginal Revolution's Tyler Cowen who attempts to think like an Austrian economist for a little bit, and, for once,
actually makes some sense: Monetarists are a really strange group of people, because they are, at heart economists who don't believe in the first law of economics. You might have heard of it... the Law of Supply and Demand. BTW, I was going to link to the Wikipedia for a description of this law, but the first sentence was so monumentally stupid it could only have been written by a Marxist. The Law of Supply and Demand does not
assume perfect competition of the type described therein, it is simply an outgrowth of the statement that all actors in a given economy are purposeful.
But, back to monetarists. Oh they talk a pretty good game about a great many topics, but they somehow, though, don't believe that that Law applies to money, and this is both their downfall philosophically/analytically and the fulcrum by which they vaulted into power after the first repudiation of Keynesianism took place with the Bretton Woods agreement and later with Milton Friedman's advice to president Reagan. BTW, Keynesians are not economists anymore than snake oil salesmen are potatoes.
As far as the Econoclast's comments are concerned, the recent reactions by the Fed to raise interest rates are, yes, wholly in-keeping with Austrian analysis of the situation. So, John, if that works for you.... Come on in, the water's fine, we promise not to bite (too much).
The cost of money has been too low (real interest reates [Fed Rate - CPI] are/have been sharply negative) for there to be continued desire on the part of foreign central banks to buy debt issued by the U.S. Treasury, because, even though central bankers are complete imbeciles(see the Weekly Wisdom of the Mighty Mogambo [WWotMM]), they don't like to lose money on their investments any more than I do.
One of the key things to keep in mind when discussing central banks is that they do not set interest rates, they only guide interest rates with the rate at which they themselves print money. There is a distinct difference. When there is no demand for the money a particular bank prints, they have to make it scarce in order to raise it's price (rate of interest). It is my contention that the Fed is allowing the rate of interest for borrowing dollars to rise because they have no other choice. Demand for the dollar is very low, as evinced by the Worst Chart in the History of Man. Austrian Business Cycle Theory has successfully predicted this situation. [Aside: the current correction in the $USD is a technical one at best. Any breakdown below .800 on that chart is a disaster.] The central bank has printed so much money previously that the distortions of price have, inturn, created so much mal-investment of real capital and so much debt that there is no more demand for the money. We tend to call this "Pushing on a String" -- The Fed can print all the money they wish to spur economic activity, but if there are no buyers, well, what then? The Law of Supply and Demand rears it's ugly head once again.
We in the U.S. have been bailed out repeatedly by other central banks (namely China and Japan) but that has to end at some point. The Japanese have been at Zero-bounded interest rates for a decade, and, despite the best efforts of the Bank of Japan to debase the Yen, the gross mal-investment evident in the 1980's Japanese economy has finally been worked off. The Chinese have used a monetarist idea - the currency peg - to leverage an enormous work force into a global powerhouse. With new markets strengthening all over the Pacific Rim the Chinese dependence on selling their goods to debt-ridden Americans will be over soon. When they loosen up that currency peg, allowing the Renminbi to float, that will be the death knell for the US Dollar in the short term.
So, for Mr. Cowen, who stated in his post that if he believed in the Austrian Business Cycle he would buy US T-Bill shorts, I would exhort him to do the more rational and time-tested thing, which is to buy gold. Monetarist theory states that gold cannot do well with rising interest rates (with gold and the dollar in competition the theory goes, the higher interest rates go the more attractive the dollar and the less attractive gold), which doesn't fit the actual data at all. Gold's legendary run in the 1970's came with rising interest rates, while it suffered a brutal Bear Market all during the 20+ year Bond Bull Market (low interest rates). Furthermore, there's no time-dependance, greeks, noise, swing-traders, or other nonsense in gold, just a commodity whose value is at minimum the cost of it's production. And, by gold I do not mean that junk they sell on Comex, but the real thing. Physical coins in your possession, with a dog, a gun, and a good bottle of scotch to protect them, is the only rational and purposeful reaction to the noise of the current marketplace.
I do, however, recommend, if the Dollar survives the next 5 years, and if, you bought and held onto the gold I advised you to buy today, that when interest rates hit their peak.... you buy 30-year T-bills and then live like a king off the stupid amount of interest they will generate you until you are much older and wiser than you obviously are today.
Ta,
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