Writes Gary North:
I am writing to you because I regard you as the man of the hour, at least for the next 18 months. More than any other follower of Mises, you are the person who has devoted the greatest amount of thought to monetary theory. You also have the academic credentials that are necessary to get a hearing.
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“It will also undermine Mises’ methodology, since he always argued that the facts cannot refute logical theory. Hardly anyone believes him. So, on two fronts, Austrian economics will be under assault.”
Erm, no? If he is correct on methodology it will precisely have no such effect. It’ll just show he was wrong on money and that the theory needs revision… a big if.
If prices fail to go up, it only proves that there was a sudden increase in the demand for the USD brand of toilet paper. What’s wrong with that?
Absolutely, the demand to hold money cannot be overlooked when looking for the effects of an increase in the supply of money.
For example, even if unemployment compensation were to 100% replace lost income, anyone who used to be paid by the week and is now compensated by the month, with the same total pay, will tend to hold a significantly higher average quantity of money, offsetting part of an increase in the supply of money. Rothbard noted this effect when he was paid only once a year by one of the foundations that he worked for, if memory serves.
Regards, Don
What is the timeframe? The manipulators can keep a lot of things invisible for years, but eventially money supply going up must be reflected in prices. This is made even harder to see because “productivity” changes along the way, along with both technology and consumer preference.
Pet rocks are not worth much now, even though the money supply hsa changed. Not to mention all the christmas toys of the season over the years. I could go on, but the point is if you can choose what to look at you can get any result you want. Houses and stocks were not counted in inflation in the last boom, but the money had to go someplace.
Good points Inquisitor and Bastiat79. I agree.
i quite like some of his stuff, but north makes errors on monetary analysis. see his tiff with steve saville:
http://safehaven.com/article-9844.htm
http://safehaven.com/article-9872.htm
all power to him for putting his mob into t-bonds and enjoying the panic buy-in, i just hope he’s got them out now. (irving fisher lost all his money in the depression, and then some. mises didn’t).
Inflation = Net Expansion of money and credit. The last 18 months has seen mass destruction of credit (leverage in reverse).
The deflation of credit is dwarfing the inflation of money, hence prices are falling. The Fed can create trillions before it gains traction in rising prices.
Nothing wrong with Austrian Economics and Mises’s theory. You just have to look at it properly.
“I hope you will load up several magazines with ammo, get out your AK-47, and start shooting.”
Hope FBI-webcrawler can do context analysis too….
By the way, positivist predicting economic branche has nothing on praxeological explaining economic branche with regard to prediction. As long as the positivists won’t revise their applicability domain and/or revise their whole philosophical (philosophy of science) outlook, they never will.
A Long, Hülsmann, Salerno team-up will surely rock magazine-land when executed well. Good luck!
Regarding the unprecedented level of excess bank reserves, we should not forget that the balance sheets of many banks have been decimated by the precipitous decline in value of certain securities held by the commercial banks as assets. The value of these securities has been greatly impaired by the non-performance of many sub-prime and other mortgages that were to have supplied cash flow to support the securities. The banks will not significantly lend out the reserves recently injected by the Fed until their balance sheets have been repaired, and the money supply will not reflect the recent massive Fed injections of reserves until these reserves are lent out by the fractional reserve banking system.
Unfortunately, one of the fundamental roles of the Fed is to maintain the solvency of the banking system, including bailing out the large and politically connected banks when they experience financial difficulty. The Fed’s recent unprecedented injections of reserves are an attempt not only to increase aggregate demand, but just as significantly, to shore up the severely damaged bank balance sheets. Murray Rothbard, perhaps more than anyone else, has emphasized the destructive role of the Fed’s interventionist attempts to maintain the health of the banking system, which of course, come at the expense of the more productive sectors of the economy.
Any empirical “test†of Mises’s monetary theory and those of Fisher and Keynes needs to acknowledge the Fed’s major and pernicious goal of maintaining the banking system’s solvency.
If prices do not go up, this does not mean that inflation did not occur. Inflation does NOT mean higher prices as a necessity. Inflation simply means monetary supply increased. Most government economists refer to inflation as the increase in GDP and NOT the money supply. There is a misunderstanding of words here. This is obvious because inflation of the money supply is occurring while the GDP is dropping.
If the price of a product remains the same and the monetary pool is increased, this simply means the value of the product has dropped. This is indicative of a previously overvalued product whose price is becoming more normal.
E.G. Say a house costs $1 today. If people don’t see that price go up, they assume no inflation has occurred. However, if the money supply was doubled tomorrow and the price is still $1 for a house then the value of the house has dropped by 50%.
The question remains unanswered. What would von Mises say?
We have no velocity and we have a major drop in available credit.
I say he would look at the monetary base and predict inflation (in assets, commodities and goods/services).
Inflation price comes more from monetization of public debt, not so much from credit (from pure money creation) inflation.
So, till now monetary base increases reflected the reserves injections in order for banks not to fail from bank runs (money transfers to others banks).
Real quick price inflation comes from pure spending of new money (monetization of public deficts) and that´s why, if you think of it, is less evil than credit inflation that is the basic cause for booms (in capital goods and real assets) and busts.
Anyway, M2 is now increasing at almost 10% YoY and that is a sign that the price inflation shoud appear soon.
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