Posted on 03/10/2009 5:09:22 PM PDT by An Old Man
Austrian Enginomics Fundamentals
The fundamental premise of Austrian Enginomics is described on my home page (www.austrianenginomics.com), and it references two macroeconomic conditions, 1) Resource misallocation, and 2) Overvaluation of assets (bubbles) in Stocks, Bonds, and Real Estate. These conditions have built up to unprecedented extremes during the past 35 years reaching a pinnacle about one year ago.
In our modern day world of virtual reality people have been conditioned to believe financial assets are "real wealth"(1). It’s not surprising because we are all used to exchanging financial assets for “real wealth”; hence we all believe that the greater our financial asset stash, the wealthier (and more secure) we are. A written financial bank or brokerage statement is very convincing. If one’s 401K indicates a grand total of $223,549.38, then it MUST be worth $223,549.38! If a mysterious force reduces that total, then we feel the LOSS of wealth, and believe our buying power is less than it was prior to the drop. Conversely, if it gains in value, then we believe we’ve earned real wealth with increased buying power. But…What if the entire basis of the “$” measurement is largely an illusion? What if it were possible for a very powerful force to manipulate the quantity and value of those “$’s”, and lead you to believe there is more buying power there than exists? How could that powerful force be motivated to do such a thing?
The Truth
Cash (fiat currency), all debt securities, and the overvalued portion of stocks and real estate are NOT "real wealth". At best, they are contracts to acquire "real wealth". When they have been allowed to expand at a rate faster than GDP Output, illusions of wealth or bubbles are formed. Near the end of last year (2007) the aggregate size of the bubbles in stocks, bonds, and real estate peaked. I recognize this bubble size as the gap between the calculated fundamental level of those assets and their current market values. Please reference my graph here http://www.austrianenginomics.com/id10.html . Ultimately, the markets correct from these bubbles as they are discovered. The real estate bubble began its discovery process in early 2006. The Stock market bubble began is discovery process in October 2007. The last and most dangerous bond market bubble is peaking and in discovery TODAY.
Why Will Government Efforts Fail?
Government intervention efforts will fail to prevent the upcoming depression! Again, the fundamental macroeconomic issues plaguing us are the aggregate market overvaluation and the misallocation of resources. Government intervention (e.g. nationalizing companies) will not address their overvaluation or misallocation of resources. In fact, government does just the opposite by design. They will continue efforts to keep all markets levitated and keep the illusion alive. Government also supports efforts to resist liquidation of misallocated resources and allow them a return to market-justified enterprises.
Government has the power to shift one illusion (bubble) to another by debasing our currency (inflation). Their goal is to prevent the overvalued market nominal levels (stocks, bonds, and real estate) from falling due to natural market pressures by simply monetizing debt as necessary to devalue the real value of the assets. For example, if a $20 share of Citigroup is really worth $5 in today's dollars, then simply inflate the currency system by 400% and, magic, you now have Citigroup worth a “legitimate” $20 in the newly cheapened currency valuation. Will one share of Citigroup buy more real wealth after the currency destruction than before? Of course not, but government can claim you have lost nothing....! Add the ongoing inflation data calculation distortions into the mix, and you have no clue what your real buying power is!
Government will Cause it.
ping for later
Unmitigated greed caused the recession, liberal communist governmental policies will ensure it's decline into a full blown depression. We have sowed the wind, we will reap the whirlwind.
:"Government has the power to shift one illusion (bubble) to another by debasing our currency (inflation). Their goal is to prevent the overvalued market nominal levels (stocks, bonds, and real estate) from falling due to natural market pressures by simply monetizing debt as necessary to devalue the real value of the assets. For example, if a $20 share of Citigroup is really worth $5 in today's dollars, then simply inflate the currency system by 400% and, magic, you now have Citigroup worth a “legitimate” $20 in the newly cheapened currency valuation. Will one share of Citigroup buy more real wealth after the currency destruction than before? Of course not, but government can claim you have lost nothing....! Add the ongoing inflation data calculation distortions into the mix, and you have no clue what your real buying power is!"
Entire Article:Why Will Government Intervention Efforts Fail to Avert the Depression?
This is something I don’t exactly understand.
I hear over and over Ad Nauseum about “getting the credit market moving” again.
Why is the conomy so addicted to credit? What does credit do that money cannot? Does this mean that if everyone had enough money to pay off all their debts, and had no need to borrow anything, that the economy would collapse anyways?
Effin snake oil salesmen set this crap up. Actually, I guess I’m being unfair to snake oil salesmen!
Thanks for the ping.
An Obama official on ABC or CNN last week stated that when the FDIC runs out of money they’ll start printing more.
Credit artificially stimulates the economy in the short term, by stifling the economy in the long term. Politicians and bankers only care about the short term — politicians for the next election and bankers for the next bonus cycle.
So if they can reflate the economy in the short term, they can both get richer and more powerful in the short term, with the hope of disconnecting from the grid as millionaires before the grid shorts out.
That is why they like credit.
Of course, short term booms mean long term busts. And the greater the boom the greater the bust. That is why we are heading for a depression today. Our credit boom was too boomy. Now the rich and powerful, and those who are trying to be rich and powerful, are trying for another big push so they can hang on and ride out the inevitable depression in style. If they can push this back another 10 years, and create another boom — a BIGGER boom, then they will be set for the even bigger depression guaranteed by that new boom.
Got it?
Credit allows people to temporarily leverage their spending and investing power so we can all pretend to be richer than we are. The rich and powerful skim all the cream off the top during these booms, and you the little guy, you get the shaft because they take your cream when the cycle collapses. The cycle is collapsing. A depression is coming, and they’ve got your cream. The ones right behind them want to pump the economy and have one more fake boom using credit, so they can get rich and ride out the depression in style.
This is a fact.
The Brits are already doing it...it is called, quantative easing.
By constantly increasing the amount of credit, the Fed can continue to grow GDP. If done prudently, the Fed can grow the economy for a very long time. But, ala' Greenspan, once you cut interest rates and keep pumping more cheap credit into the economy to grow it (trying to make everyone in the economy rich) you can create a bubble and bubbles will burst at some point. This is where we are now.
Some credit is good. Too much credit is bad. We are paying for too much easy credit.
I call it “hellooooooo Zimbabwe!”
or
“time for C_of_D to stock up on tradeable goods for the time when paper currency is worthless”
But then again I am a lowly peasant and not educated in things of this nature :-)
There's credit of the consuming kind & then there's credit used to gather together the resources to get the job done, for things like machinery and equipment. A machine that costs $100K might pay for itself in less than a year, but it's not likely to do it sitting with the company that built it.
Also, there's a whole lot of credit extended between businesses & their vendors. There's a large untold story that I will call ages of accounts receivables & payables. The gov will tell you status of inventory, whether they're on the rise or dropping, but I've yet to hear a single report on whether or not payments between companies are growing longer, staying generally the same or getting shorter. Another thing that's never reported is the adjustment of terms offered to bring the ages of receivables back into line. The usual strategies to speed up payment are discounts for early pay or COD to customers that have begun to pay too slow.
Good points. Credit is an artificial wealth multiplier. It multiplies the effect (leverage) but the impact is artificial. This is a generaliziation, as not all credit is bad. The debt from a student loan to get the education to become a brain surgeon pays for itself many times over, so that is a good invesment. The deferred cost is paid for easily in a short time.
All credit should be like this. Investing in infrastructure, production, R&D, training and education, new technology, etc. Credit for increased consumption is just artificial wealth today that has to be painfully paid off tomorrow. Schiff is right on that point.
Yes, without doubt you are right. I was speaking of credit for consumption of the type that fueled our recent, huge, unsustainable, depression-inducing bubbles.
Okay, then I'm trying to figure out why you're trying to lay blame on the "fat cats" for the poor impulse control of some of their customers.
But, consumer credit is really only a claim against future earnings. Spend today and earn tomorrow. It is intoxicating. Every credit card ad you see suggests you can have “it” now, rather than waiting until you have the money.
This supercharging of consumer spending has seriously increased the money supply (if you count consumer credit as money) and indebted the public. Serfs, really. The Company Store on steroids. And, yes, it does make the average Joe feel rich. He can buy stuff his grandparents never dreamed they'd own. So... by raising taxes and cutting credit availability we can expect a long period of lower consumption and crabby citizens.
You see it very clearly.
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