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Source link: http://archive.mises.org/16573/fear-the-boom-not-the-bust/

Fear the Boom, Not the Bust

April 21, 2011 by

All of the industrial world’s central banks and public treasuries currently are engaged in an impossible exercise. FULL ARTICLE by Patrick Barron

{ 11 comments }

F. Beard April 21, 2011 at 9:12 am

Actually the bust is just as wicked as the boom since they are both phases of the same wicked fractional reserve lending scheme.

The short term remedy is an equal bailout check sent to every American of new debt and interest free full legal tender fiat – United States Notes. The long term solution is separate government and private money supplies per Matthew 22:16-22.

And btw, government recognition of any money but its own fiat is fascist, not libertarian.

Daniel April 21, 2011 at 4:02 pm

I’m new to this whole Austrian thing; what did you mean by gold covering the money supply? How did you calculate those values?

Thanks.

Patrick Barron April 22, 2011 at 3:03 pm

Divide the amount owned by the Fed into the appropriate aggregate. For example, dividing M1 in 1980–$386 billion–by the gold owned by the Fed–261.5 million ounces–equals $1,476. In other words, M1 could be “covered by gold” in 1980 at $1,476, or stated differently, the Fed could have established a marginal 100% reserve of M1 in 1980 at $1,476 per ounce. By 2011 that number had risen to $7,090. The Fed still owned the same amount of gold, but it had allowed M1 to grow to $1.854 trillion.

Dick Fox April 21, 2011 at 4:34 pm

Two thoughts.

First, Mr. Baron’s suggestion that gold is a good investment is risky. Gold under a fiat currency system is driven by similar forces to those driving other commodities. When the bust hits other commodities it will also hit gold. Consider the price of gold hitting a high of $1,011 in March 2008 only to crash to $761 eight months later in November.

Secondly, the problem with the boom is that it is usually followed by austerity. Of course the boom is bad but so is the bust. To suddenly place a brick wall in front of a man running at full speed will not lead him to recovery. Mises teaches to fear the deflation as much as the inflation. We must be careful celebrating the bust because often the bust is a result of bad policy in one direction intended to correct previous bad policies in the other direction. Fear the boom because of the bust, not instead of the bust.

John P. Cunnane April 22, 2011 at 8:37 am

If you look at the growth in the money supply and the deficit spending that has occurred since the bust began, I wonder how you could make the claim that a ” brick wall has been placed in front of a man running full speed”. It is also untrue that this is what occurred during the depression.

What has occurred is that the man running full speed ran out energy so the government decided we would build moving walk ways (as seen in airports) as a way of helping him continue to move. We diverted resources from a host of areas to build these walkways, in fact our entire economy is predicated on the idea of continuing forward momentum at all costs (including those incurred by savers, future generations, et al).

I also disagree with your comment that Mises teaches us to fear deflation as much as inflation. Mises writes at length about intervention, which almost always takes the form of inflation. His comments about deflation are scant in comparison.

I agree that gold is of little practical use and there are better ways to hedge against the inflation in the money supply.

Gilbert W. Chapman April 22, 2011 at 9:33 am

While the volume of words on deflation are certainly fewer than those regarding inflation, I would not interpret Mises’ “scant” comments as an idication he ignores deflation. Several of his ‘notes’ on deflation, within “Human Action”, are extremely forceful, i.e. page 566.

As an aside, while discussing the possibility of deflation in the mid 70′s*** with Hayek, he pointedly commented that the possibility of an extended period of deflation was most unlikely. When I asked why, he responded, “The masses will never accept it.” He expanded his observation by suggesting that most people feel richer when they have more money in hand, even if its purchasing power is diminished.

I will conclude by sugggesting that Mises’ comments on deflation were sparse simply because there have been few (if any) instances when the supply of fiat money has been reduced; and therefore, perhaps a discussion of same was not worthy of a long and detailed dialogue, to his way of thinking (?).

*** When inflation in the US economy was a serious problem.

John P. Cunnane April 22, 2011 at 12:29 pm

My point exactly; Mises wrote less about deflation because it is not the typical manner of intervention in markets by planners.

On Page 566 of Human Action Mises writes, “Thus any attempt of the government or the labor unions to prevent or delay this adjustment (contraction) merely prolongs the stagnation.”

I love Hayek but statements like the one you quote are the reason he is a polarizing figure among Austrians.

Gilbert W. Chapman April 22, 2011 at 3:15 pm

Mr. Cunnane ~

In essence I think you and I agree; and, as you point out, it’s actually Mises and Hayek who have a difference of opinion.

I suspect Mises hoped that politicians (government) would someday act in a responsible manner that would allow the business cycle to act in a normal manner. Hayek, on the other hand, probably realized it was ‘wishful thinking’ because he knew that politicians, unions, et all would do most anything to accomodate their various special interest groups and voters.

In summary, Hayek responded with a ‘real world’ view (to my question), while Mises would have articulated the ‘ideal world’ view. And, I suspect you would agree with me that our world was fortunate to have had the wisdom of both men.

It is indeed sad that there really is little hope (Hayek) that most Americans will probably never be educated in the merits of Free Markets as some wished for (Mises).

Damn ! ! ! If only the likes of Krugman and Keynes had never been born.

Curious April 24, 2011 at 11:04 am

Mr. Cunnane:

Could you please explain your comment “I agree that gold is of little practical use and there are better ways to hedge against the inflation in the money supply.” Mind you, I am not being confrontational; I am merely interested in what you think is a better hedge against inflation. I would like to be able to take advantage of hedging to preserve myself and my family (at least somewhat) for the coming economic collapse. Your comments/response would be highly valued and appreciated. Hope to hear back from you.

John P. Cunnane April 25, 2011 at 7:11 am

I couldn’t answer that question specifically in good conscience. There are materials that have been wriiten about Austrian investment strategies and Peter Schiff writes extensively about investments. My concern about gold is that almost all of its value is derived from its status as the precious metal of choice, granted over an extended period of time. Also, etfs can be problematic in a number of ways (fees, failure to track, and manipulation) and they play a large part in gold trading. All of that being said, gold investors have certainly done well during this downturn.

Gilbert W. Chapman April 21, 2011 at 9:10 pm

I concur with you, Mr. Fox. The author assumes that gold’s intrinsic (for lack of a better word)value is about $1,500 today.There’s something ‘wrong with this picture’. If gold is really worth (in dollars) twice what it was two years ago, why haven’t (most) prices doubled, or at least gone up a lot more than they have?Further, if the author is correct, given the data in the columns further to the right, gold should be priced at no less that $3,000 per ounce, which may be true. However, I’ll believe that when I see it (and maybe we will ? ? ?).

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