My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “Live as if you were to die tomorrow. Learn as if you were to live forever.” – Mahatma Gandhi
The principle of Austrian economics is described this week which I believe offer a solution to our current problems associated with the primacy of the Federal Reserve and its continual meddling in the economic fortunes of the USA and thus the globe.
“Central banks created a monetary avalanche that has gone mainly into the financial markets and has become a source of deception for investors. In real terms, the economy has not advanced very much since the financial crisis of 2008. The valuation of financial assets has decoupled from the real economy.” Read on: https://mises.org/wire/phony-economic-growth-stats-conceal-deep-problems-main-street?utm_source=Mises+Institute+Subscriptions&utm_campaign=930670a8fa-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-930670a8fa-228270721
Here is the link to last week: Issue 59
Now that Brexit will not be coming to a final conclusion after three years, I will continue to provide weekly updates as events progress:
Brexit Update – 12th July 2019
The Brexit deadline remains 31st October 2019 and stays in place unless the next PM can get Parliament to agree a new exit plan. The progress of Brexit will be halted until a final decision is made and in the coming weeks I will report what the two candidates are saying about their ‘plans’ to execute Brexit by the end of October.
The choice so far seems quite binary between a no-deal or a good deal – Mish has a short article explaining this option:
The EU has proposed its new leaders to rule for the next five years and they are a motley bunch. “The British Conservative MEP Daniel Hannon, in a tweet, summarized: “Can anyone look at the people who will be running the EU for the next five years and then try to claim that the high tide of federalism has passed?”. Full details here:
https://www.gatestoneinstitute.org/14503/european-union-towards-superstate
Details of Parliament’s deliberations can be found here:
CHAPTER 11
MACROECONOMICS 101
“I think the person who takes a job in order to live – that is to say, for the money – has turned himself into a slave”. – Joseph Campbell
“Gold and silver are not by nature money, but money is by nature gold and silver.” – Karl Marx
“When people find they can vote themselves money; that will herald the end of the republic” – Benjamin Franklin
Main tenets of Austrian economics
It is not my intention to embark on a long treatise about the virtues of the various schools of macroeconomic thought but suffice to say that the present methods used by the majority of economists who influence government policies have demonstrated severe shortcomings in the outcomes of our global financial system.
Perhaps more emphasis on the fundamental Austrian tenets of economics might yield a more favourable result in future; Wikipedia summarises these tenets as follows: “In 1981, Fritz Machlup listed the typical views of Austrian economic thinking as:
Methodological Individualism: In the explanation of economic phenomena, we have to go back to the actions (or inaction) of individuals; groups or “collectives” cannot act except through the actions of individual members.
Methodological Subjectivism: In the explanation of economic phenomena, we have to go back to judgments and choices made by individuals on the basis of whatever knowledge they have or believe to have and whatever expectations they entertain regarding external developments and especially the perceived consequences of their own intended actions.
Tastes and Preferences: Subjective valuations of goods and services determine the demand for them so that their prices are influenced by (actual and potential) consumers.
Opportunity Costs: The costs with which producers and other economic actors calculate reflect the alternative opportunities that must be foregone; as productive services are employed for one purpose, all alternative uses have to be sacrificed.
Marginalism: In all economic designs, the values, costs, revenues, productivity, etc., are determined by the significance of the last unit added to or subtracted from the total.
Time Structure of Production and Consumption: Decisions to save reflect “time preferences” regarding consumption in the immediate, distant, or indefinite future, and investments are made in view of larger outputs expected to be obtained if more time-taking production processes are undertaken.” He included two additional tenets held by the Mises branch of Austrian economics:
“Consumer Sovereignty: The influence consumers have on the effective demand for goods and services and, through the prices which result in free competitive markets, on the production plans of producers and investors, is not merely a hard fact but also an important objective, attainable only by complete avoidance of governmental interference with the markets and of restrictions on the freedom of sellers and buyers to follow their own judgment regarding quantities, qualities, and prices of products and services.
Political Individualism: Only when individuals are given full economic freedom will it be possible to secure political and moral freedom. Restrictions on economic freedom lead, sooner or later, to an extension of the coercive activities of the state into the political domain, undermining and eventually destroying the essential individual liberties which the capitalistic societies were able to attain in the nineteenth century.”
The Business Cycle explained
The Austrian theory of the business cycle (“ABCT”) focuses on banks’ issuance of credit as the cause of economic fluctuations. Although later elaborated by Hayek and others, the theory was first set forth by Mises, who believed that banks extend credit at artificially low interest rates, causing businesses to invest in relatively roundabout production processes. Mises stated that this led to a misallocation of resources which he called malinvestment and which eventually leads to a ‘boom-bust’ economic cycle.
Just as Carl Marx expected, capitalism experiences a series of ever-larger boom-bust cycles that eventually precipitate revolution and an overthrow of the existing financial-political order which we see panning out in our present era.
Marx recognized that industrial capital (as opposed to finance capital) could only increase profits and accumulate more capital by raising production or by establishing a price-fixing monopoly. Again we see this currently with massive global conglomerates controlling large areas of economic activity across the world – described as economic globalism.
Under this scenario technology has advanced rapidly because corporations can invest their massive profits in future developments with the objective of minimising labour costs by labour force reductions and lower wages. Once again we witness exactly this happening today.
Business Cycles and changes in the money supply
As we have seen our global economy is managed by Keynesian economists and later on ‘monetarists’. According to Milton Friedman, the arch monetarist, the root of the business cycle is the fluctuations in the growth rate of the money supply. He proposed that central bankers should maintain a steady rate of money supply growth.
However, we know that it is the printing of money ‘out-of-thin-air’ i.e. at no cost, central banks and magnified by fractional reserve lending in the commercial bank systems that causes the business cycle swings.
In fact the increase in money supply of this nature causes non-productive activities, which consume resources whilst adding nothing to the pool of real wealth, corrupting the real wealth-generation process. This diversion causes connected people, being early receivers of newly created money, to exchange new ‘bad’ money for real goods and services but contributing nothing to production. Producers, having received this newly printed money later discover that prices have increased which is what we can ‘inflation’.
In our current financial system, when borrowed money is repaid to a bank and the bank does not renew the loan, the money disappears out of the system altogether. Thus a fall in the rate of supply of money undermines the ability of non-productive actors to continue expanding their activities and an economic downturn occurs. In order to keep the apparent expansion going the Fed has to continue printing money indefinitely but of course there has to be a limit and this is where we are today.
The solution, according to Austrian economic theory is to revert to 100% reserve banking as opposed to the fractional method we use today. There may even be a place for central banks in this new paradigm but a crisis will allow more rational economic minds to prevail. Expanding the money supply now is actually reducing the growth rate of economies and we will look at this further in Chapter 12 – The End of Growth.
To be continued next Saturday
Yes, the Fed Central Bank and associate banks (which are Sovereign Foreign Properties like embassies) have created trillions of dollars out of thin air since 1971 (when they left the Gold Standard) that goes to stocks; but by what methods? Since the Fed cannot be audited by the US government, not that it could be trusted, you can be assured vast sums pour out “back door” money spigots to chosen people (can you say 1% children?) at special low rates (even No Recourse Loans), agents who then buy DOW (and as of this moment, all stocks) and whole companies. They also buy PM ETFs to drive gold & silver below $1400 & $15. They will be buying farms like it was 1929.
Agree Robert, thank you and I would add that the immense amount of stock buy-backs has added a vast amount to the stock market too. I am sure that this will continue until the final crash comes but unfortunately nobody can say when. The bond market knows and is signalling. My belief is this autumn but that is just a guess based on current adverse economic data coming out these days – a significant global slowdown without a doubt.