None of this should surprise those conversant with Austrian economics. The “fundamentals” of the economy have been and remain awful because the government and Federal Reserve are consistently doing the wrong things. The apparent recovery, fueled by Bernanke’s sheer money creation, has been bogus all along.

Bubble, Bubble, Bubble

For some reason, people still cling to the vague hope that – at least if we wait long enough – the market always goes up, and “buy and hold” is a great strategy. Let’s look at a long-term chart of the S&P 500:

Does the above chart really look like the US stock market is in store for smooth sailing? Just about everyone except Chicago School economists now recognizes, after the fact, that the United States obviously went through a tech and dot-com bubble in the late 1990s and then a housing bubble a few years later. Is it really so difficult to understand that trillions in government budget deficits over the past few years, coupled with unprecedented inflation by the central bank, have set the economy up for yet another crash?

Alan Greenspan’s low-interest-rate policy in the wake of the dot-com crash spawned the housing bubble. Greenspan’s Fed didn’t actually eliminate the need for a recession, but instead postponed the crisis and made it fester. When reality hit in September 2008, Ben Bernanke was in charge of the Fed and implemented his predecessor’s failed approach times ten.

No matter how many pundits and famous economists declare otherwise, Bernanke did not save the day with his interventions. He has simply postponed the day of reckoning yet again, and we can expect the final crisis to be much worse than the mere collapse of a few major investment banks. (The short documentary Overdose makes the case in a chilling fashion.)

Ben Bernanke Engineered the “Recovery,” All Right

In a perverse way, the pundits are correct in crediting Ben Bernanke’s extraordinary programs for “rescuing” the stock market. If we zoom in on the chart of the S&P 500 and superimpose the monetary base, we can see how closely the two have moved since the crisis began.

Although the above chart shows a decent fit, in reality the stock market responded very quickly to changes in the expectations of Fed expansion. Specifically, the sharp upswing in the S&P 500 in March 2009 coincided with the announcement of the Fed’s full strategy for (what we now call) QE1, and the market rally in the late summer of 2010 began as knowledgeable Fed officials made it clearer and clearer that QE2 would kick in after the fall elections.

Of course, those economists who believe Bernanke is engaging in a tight-money policy would point to the above as evidence in their favor – the Fed just needs to print more, because it’s worked twice already! But if one believes that showering trillions of newly created dollars into the financial sector (with the specific aim of bailing out the very parties who made reckless loans and investments during the housing bubble) is notconducive to a healthy recovery, then the booming stock market of the last few years should have been an ominous sign. Note that this isn’t 20/20 hindsight; other Austrians and I have been warning that this “recovery” has been bogus all along, and that the stock market could collapse at any time.
Inflation Lifts All Boats

None of the above analysis implies that investors should dump all equities immediately. It is true that the prospects for real economic growth are terrible – especially in the Western countries – over the next decade, because of increased regulations and swollen government debt loads. But at the same time, various central banks, especially the Federal Reserve, have been all too willing to create new money as an apparent solution to every crisis. (A case in point was the absurd proposal for the Treasury to issue two trillion-dollar platinum coins to evade the statutory debt ceiling.)

In this environment, someone relying on fixed-income investments (such as private annuities or, heaven forbid, government retirement checks) could be wiped out by massive price inflation. As awful as the US real-estate and stock markets might be in the short and medium run, holding a portion of one’s wealth in assets not denominated in fiat currency may turn out to be a very wise defensive move. (The problem with shooting the moon on precious metals is that for all we know the dollar will crash next year and Obama will make it illegal to buy and sell gold.)

Conclusion

The US economy still needs to recover from the festering malinvestments that accumulated during the previous two booms. By pushing interest rates down to zero and bailing out the very people who made such bad financial decisions in the first place, the Fed and Treasury are doing everything they can to exacerbate the problem.

In this volatile world economy, investors can expect continued volatility in the stock market. The only thing we can really be sure of is that the government will use each new crisis to justify further extensions of its power. At some point the feds will probably seize the highly volatile 401(k)s and other stock-market holdings from citizens and replace them with “safe” government annuities.

Knowledge of Austrian economics doesn’t render someone an expert investor, but it certainly gives advance warning of the major trends in the economy. Those investors who rely on the Keynesians featured at CNBC think that another stimulus package or QE3 might do the trick.

Why Is the Stock Market Crashing? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

You might be asking, where is Human Action? Where is Man, Economy, and State? And where is Money, Bank Credit, and Economic Cycles? Well, these books are there too, further along the shelf. But the Big Three bob in an exalted gravitational bubble of their own, because they form the solar core of my own personal life-long cure from socialism, along with various lesser satellites which rotate around them, including 1984, Atlas Shrugged, and An American in the Gulag.

As a hard-core Stalinist by the age of nine, after having read Das Kapital in my local state library, by the time I had reached thirty I had mellowed slightly into a hard-core Marxist and a willing clandestine ex-Militant Tendency foot-soldier in the Machiavellian rise of the New Labour army in Britain, most of us following the camp magazine, Marxism Today, edited by Martin Jacques, the man who invented the term “Thatcherism”. I was so far entombed within this appalling Death-Eating dark side, that I’m convinced, looking back, I must have had snake’s eyes, a forked tail, and diabolical horns.

Fortunately, I managed to cure myself from this orcish horror, mainly due to the fact, of course, that socialism is utter self-serving elite-generated nonsense and the most evil destructive bone-headed religion that mankind has ever invented. Amongst many other disastrous human-hating onslaughts it has engaged in, in its bid to keep people stupid, sick, and poor — and thus easier to rule over and exploit as tax cattle — socialism has slaughtered tens of millions of people, particularly in the twentieth century, which must truly be its envious bloody golden age. Alas, it took many years to cure myself from this virulent mental infection, involving a decade of self-realisation, self-study, and many tough self-directed questions, as well as several broken relationships, memorable bitter accusations of treachery, and the painful sloughing of mental habits burned into my mind through years of angry hatred and vicious envy.

The three books which finally wiped the usually-immune virus of socialism clean from my mind were the exalted Big Three above, especially Socialism, by Ludwig von Mises, a book which always remains fresh and inspirational on every re-read, a sort of non-fictional equivalent of Lord of the Rings.

But did room exist for a fourth book within my hallowed core? Was I genuinely fully cured or was there the remotest chance I could slip back into the skeletal clutches of Voldemort’s Sauronesque worshippers, the fatally conceited socialist Death Eaters?

Fortunately, I think I am now fairly resistant to the drenching poison of Marxism, and all of its goblinesque derivatives such as environmentalism. However, as the fabulous George Carlin pointed out in one of his amazing HBO specials, you always need to keep your immune system in tip-top fighting order to kill off the re-entry of old familiar viruses. Perhaps I needed a fourth book to provide this required re-inoculation of my fighting spirit against the seemingly endless mindless legions of the state-indoctrinated cannon fodder of socialism?

I think I have now stumbled upon this fourth book.

Although my self-education had kicked socialism back into the envious schoolyard nursery where it belongs, all the books I had read had never clarified one last question, which had nagged at me for years. Why does socialism keep taking so long to fail, with the Soviet Union surviving for 70 years and the fiat currency union of the west surviving for 40 years, since 1971? Yes, there is economic calculation, the short-sightedness of fools, and the system of organised criminal lies which we name government, but what is the essential mechanism that separates the free market from the jackboot of socialism and how does a typical rancid and rotten bloom of socialism survive for decades, when from my previous readings such a malodourous bloom ought to fail within years or even months, once the hideous mask of its hateful spiteful envy is revealed?

Even the most virulent and aggressive form of the creed — the National Socialist German Workers’ Party — managed to survive for a dozen years, from 1933 to 1945, before this particularly cancerous party of socialism imploded, with milder forms of the disease, such as our own British Labour Party, managing to survive for a hundred years before collapsing in 1979, only to re-appear in a more camouflaged form as the more fascist variant of New Labour, which predictably blew itself out after thirteen unlucky years of boom and bust, hopefully to now die under the feeble and pathetic leadership of the spectacularly inglorious Ed Miliband, son of the influential Marxist intellectual, Ralph Miliband.

Yes, we can talk about western subsidies to the Soviets and the misplaced faith of people in central banks to refrain from inflating, but this is skirting the central issue; why does socialism survive for decades, no matter how appalling its variant form? If we are to believe that socialism is stupid and self-destructive, why has it taken such a hold of humanity and why does it keep surviving and prospering for so long in its various incarnations? If the flowering Hayekian market of ideas and the evolving Schumpeterian market of freely creative destructionism really do work in partnership to drive out failed innovations and to promote successful inspirations, why are there so many Keynesians and so few Austrians? Why is there so much government and why is there so little freedom?

Jesús Huerta de Soto uncovers and reveals the mysterious ghost-in-the-machine hiding behind these questions in a beautifully simple connective way, in Socialism, Economic Calculation, and Entrepreneurship. He distils the rough juniper berries of human action into the Bombay Sapphire gin of entrepreneurship and elegantly blends this with the chilled quinine tonic of economic calculation. Delicately mixing this with the limes of Salamancan history and the Andalusian bitterness of political analysis, the resulting 300-page book is one of the finest Austrian monographs I have ever had the privilege of reading and easily breaks into my triumvirate of heroic works, to help form a new quadrumvirate.

Yes, the top-ranking book is still Socialism, as Gandalf the White, with the other three jostling alongside as Aragorn, Gimli, and Legolas; Socialism, Economic Calculation, and Entrepreneurship now plays the role of the far-seeing prince of the Mirkwood elves.

So how does Legolas achieve this far-sightedness, where Gandalf, Aragorn, and Gimli fall short? Because Huerta de Soto uses both sides of the mind in equal measure, including the parallel-processing right-mind, whereas most writers typically concentrate on the serial-processing left-mind. Drawing parallel-processed pictures with his words to complement a serial-processed stream of ideas, Huerta de Soto achieves a delicately balanced act between the right and the left conscious minds, enabling them to work together to see through to the root causes of the failure of socialism and the triumph of the free market. As I sat reading his book, I could see a sparkling and ever-changing set of shimmering human connections constantly changing and shifting, with the lights of new ideas twinkling in a flexible Hayekian blend of free human thoughts and actions, always evolving towards — though never achieving — a final perfect form where humanity is best served by this diaphanous liquid molecular structure.

I could also see the destructive boot and the mindless compartmentalising scalpels of the blind self-serving socialist elite, constantly trying to wreck this evolving form and to cut its connections to make this glittering form do what they wanted and to do what served their personal immoral interests, against the independent temporal wishes of the rest of the nodal system. However, despite this constant unwelcome interference, no matter where the socialist boot falls and no matter where its regulatory controls cut the informational connections, the entity always tries to survive, like an ants’ nest disturbed by a spade in your back garden.

Socialism thus survives because of the free market, which constantly tries to repair the damage socialism causes through its taxations, regulations, and debt-fed inflations. The free market self-repairs, re-connects, and re-organises itself — spontaneously — like a river in flow coping with the damming of malcontented beavers. The final triumph of socialism can thus be seen as the complete damming of the river and the obliteration of humanity, and the final triumph of the free market will be when this evil dam is finally dissolved, destroyed, and eradicated, and the river can flow freely again without obstruction.

Thus, the more socialism we have, the quicker it kills itself, destroying that which it parasitises, as with full-blooded national socialism and soviet communism; the more anaemic versions of socialism allow a more bloodless monster to survive longer, as with social democracy in the western world.

However, socialism is an always-expansive beast, feeding upon the seven deadly sins of wrath, greed, sloth, pride, lust, envy, and gluttony, via the mechanisms of warfare and welfare. Although the ongoing fight between socialism and the free market may sometimes be balanced for long periods, as in a fiercely contested but static Sumo wrestling contest or a brutal but static rugby scrum, socialism is thus constantly trying to break out and to crush the free market, therefore we need to obliterate this green-eyed aberration completely, if we are to achieve a safe, free, and prosperous world.

All this, and much more, becomes clear when you read Professor Huerta de Soto’s book and this short review does it little justice; you must read the book yourself to form your own conclusions. I can only say, however, that I thoroughly recommend that you do, especially all those people who wish to understand the insidious and self-righteous evil of socialism and therefore how to remove its suicidal and destructive human-hating impulses from the face of the Earth, before these self-immolating impulses destroy us in their turn.

Regards,
Andy Duncan
From the article “Jesús Huerta de Soto: Socialism, Economic Calculation and Entrepreneurship.”
Whiskey & Gunpowder

November 17, 2010

Books to Rid the Soul of Socialism was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Let me drive this point home. Without Fannie and Freddie’s certification of millions of bad loans as safe, other banks both domestic and foreign wouldn’t have bought them. More importantly, world financial markets wouldn’t have relied on those packaged loans as collateral and collapsed when they went bad. Fannie and Freddie, both government-sponsored enterprises that are guaranteed and funded by U.S. taxpayers, committed fraud so massive it dwarfs the Enron scandal.

We Austrian economists saw this coming three decades ago. I warned in the 1980s that government involvement in the housing market would inevitably produce catastrophe. Even Republicans attacked me as an enemy of home ownership. The theory, held by many in both parties, was that owning a home made Americans stakeholders in the system and stabilized our economy. Others pushed the envelope further, using Fannie and Freddie as a way to give homes to low-income individuals. All very noble, of course, but it was always doomed. I hate to say I told you so but… well, actually, I don’t.

Our current administration is, of course, sticking to the story line that this “great recession” is a failure of capitalism. This won’t change because so many high-ranking administration officials profited from the mortgage fraud business.

The beginning of the Fannie and Freddie fraud that Pinto documents took place under the watch of Jim Johnson. You may know Johnson as the “trusted adviser” to the president who helped pick his running mate, Joe Biden.

While few know about Johnson’s role in the financial collapse, many know him for his legendary generosity with Fannie’s fake profits. As CEO of Fannie, he bestowed fortunes on his favorite causes, which made him one of the most popular people inside the beltway. Many of my colleagues spoke out against this laundering of the public’s money for personal and political purposes, but were ignored or attacked.

Rep. Barney Frank was the chief defender of Fannie and Freddie, accusing anyone who wanted more oversight of the out-of-control institutions of being heartless, racist or both. While I’m not a huge fan of the Bush administration, the truth is that it made multiple attempts to rein in Fannie and Freddie. Unfortunately, they were successfully parried by Frank.

Over the weekend, administration talking heads were sticking to the line that they have deterred financial disaster with bailouts and stimulus spending.

I was not as worried about the initial financial collapse and resultant recession as I was worried about the so-called fixes. I predicted then that those programs, along with efforts at massive restructuring of the economy, would not only fail to create the jobs and upturn we were promised. I told you they would slow the recovery. I include, incidentally, President Bush’s contribution to our debt and deficit as part of the problem.

Now you can read how this has actually come to pass in a great article by three University of Chicago economists, “Uncertainty and the Slow Recovery,” by Nobel laureate Gary Becker, Steven Davis and Kevin Murphy, in The Wall Street Journal online.

“In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions in 1973-75 and 1981-82.Yet recovery from the latest recession has started out much more slowly. For example, real GDP expanded by 7.7% in 1983 after unemployment peaked at 10.8% in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2% in the third quarter of 2009. Although the fourth quarter is likely to show better numbers — probably much better — there are no signs of an explosive takeoff from the recession.

“We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many and high unemployment.

“The second factor is less obvious, but possibly also of great importance. Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations — changes that could radically transform the American economy.”

Those changes, the Chicago Boyz say, have inspired hesitation, uncertainty and fear in employers and investors. As a result, they’ve waited on the sidelines to see how things play out. Not very cheering, is it? The result is that while the administration takes credit for “jobs saved,” actual unemployment figures in some areas are at Great Depression levels.

Yes, yes, yes, Obama inherited a mess. The problem with that thinking is that Congress makes policies, not presidents. When government is split, the most a president can do is use the veto, something Bush should have done regularly. For the last two years of his presidency, Democrats had the power of Congress. For two additional years, Congress was split. Democrats who now blame him for the totality of the financial failure are saying, implicitly, that he should have opposed Congress more vigorously, and I don’t think that’s their real message.

Anyway, I’m telling you that I was right about the all the ridiculous big-government solutions for a reason. I am fundamentally an optimist, and I am forecasting remarkable things in the not-so-distant future. I’m not, however, a blinkered Pollyanna like certain high-profile analysts whom we will not name.

My point is this: If someone doesn’t have a history of accurate predictions, he has no right to ask others to believe him when he makes forecasts. And I’m forecasting that the recovery, delayed as it is, will be historically unprecedented. And if you don’t want to believe me, believe Dr. Gary Becker, who has said to me, in both conversation and writing, the same thing. More importantly, he forecasts that the recovery will be driven by the breakthrough technological innovations that we are talking about and investing in now.

For transformational profits,
Patrick Cox

January 14, 2010

Fannie, Freddie, Fraud was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

- Karl Marx, 1867, Das Kapital

That quote is almost assuredly bogus. We haven’t tormented ourselves by re-reading sections of Das Kapital. Once in college was enough. This quote, though, has been making the rounds on the Internet, as if Marx and his minions somehow knew all this was coming.

Whether the analysis is accurate is a separate question from whether Marx ever wrote it. German is a torturous language to read in translation, full of compound sentences and words. And it’s highly unlikely, writing in the late 19th century, that Marx would have referred to the working class buying houses and technology. The horseless carriage hadn’t even been invented yet, much less the iPod, the BlueRay, or the George Foreman grill.

Nope. This is a clever bit of revisionism by some unemployed Marxist student or tenured professor trying to discredit the free market while rehabilitating the Marxist playbook. Marx did indeed say capitalism would eventually evolve into socialism and finally communism. He claimed it was riddled by contradictions which made the system inherently unstable.

But his theory was evolutionary, based on his views of human nature and a rational “homo economicus.” Like Adam Smith, Marx was a materialist who defined wealth in terms of physical goods. Thus, his view of human nature is rather material too, which explains his atheism.

In any event, the Austrians (especially Rothbard) would point out that the boom-bust feature of capitalist economies is not inherent in the system, but is actually a product of the government’s manipulation of interest rates. This changes the price of money and causes risk-taking entrepreneurs to miscalculate the underlying demand for their production.

Thus, you get a massive, credit-induced production bubble, global in scale with resources devoted to supplying a fictional demand. It happened with residential real estate in the U.S. and Europe. It’s happened with commercial real estate in China. And it probably happened all along the commodity supply chain, as raw material demand increased for the production of finished goods made in China for Americans who bought on credit.

That isn’t to say you wouldn’t have normal cycles of growth and recession in an economy with natural interest rates. But in an economy with natural interest rates, the cost of capital would go up during a recession. Bankers would get more prudent with their lending as the market place sorted out which lending resulted in productive new enterprise and which businesses failed.

The bad investments would be written down and eventually new demand for capital from entrepreneurs would resume. At least, that’s how the Austrians drew it up. Today, of course, we are engaged in the great global project of trying to prop up investments gone bad, whether they be in residential American real estate or the collateralised bonds based on that real estate that currently reside like dead weight on balance sheets all over the globe.

No amount of rearranging is going to improve the quality of those debts. But that won’t keep political busy bodies from trying—and wasting even more time and capital.

Stocks in the U.S. were up overnight. Here in Australia, the blind are following where the deaf boldly lead. But is anyone listening? Or is everyone too busy hoping?

What we’re talking about are Ben Bernanke’s comments. The news headlines read that he predicted the recession will end later this year and the American economy will recover in 2010. But that’s not exactly what he said.

Here exactly is what he said, “If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stabilityand only if that is the case, in my viewthere is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.”

If you wanted to put it another way, it might go like this: If our plan is successful to solve all the problems, then all the problems will have been successfully solved according to the plan.

How inspiring is that? Does it give you confidence that these guys have any idea what they’re doing?

What the system needs is more instability, not less. That is, prices and asset values need to fall to their real level to restore confidence. In this sense, a proper recession is the cure for uncertainty and instability.

Yes, we know this is in direct contradiction to what elected officials are telling you. But think for a moment of a man who’s done nothing but eat greasy and fatty foods for a year. He’s on his deathbed. His arteries are clogged with fat and cholesterol.

Now you couldn’t improve the man’s health by telling him to feel better about himself. “C’mon big fella. Buck up! Have another cheeseburger. With bacon. And avocado. This whole being morbidly obese and killing yourself thing is all in your head. You gotta get your mind right!”

You could tell him all that. But it would be bad medical advice. In the same way, our financial mal-practitioners have mis-diagnosed the economy. Confidence is not the problem. Bad credits and loans are the problem.
You restore confidence when you directly address the problem. Investors get out of cash and back into shares or property when they have demonstrable proof that the banks aren’t hiding/lying any longer.

Or, as Murray Rothbard puts it in America’s Great Depression, “The completion of liquidation removes the uncertainties of impending bankruptcy and ends the borrowers’ scramble for cash. A rapid unhampered fall in prices, both in general, and in particularly in goods of higher orders (adjusting to the mal-investments of the boom) will speedily end the realignment processes and remove expectations of further declines.”

But instead of realigning with economic reality, our policy makers are acting as if it is possible to sustain all the bad investments made during the credit boom. They want to save homeowners, shareholders, bondholders, and pretty much anyone who stands to lose from the risks gone bad.

That is not possible. Someone has to pay for the bad bets made in subprime loans, Eastern Europe, or the developing world. That someone is probably a) the guy who took out the mortgage he can’t repay, b) the bank who made the loan to the guy who took out the mortgage he can’t repay, c) the investor who bought the bond sold by the bank who made the loan to the guy who took out the mortgage he can’t repay.

Evading responsibility for one’s actions doesn’t solve anything. Making other people pay for them doesn’t help much either. Of course we’re all going to pay for it one way or another, through more bailouts or the general contraction in credit and growth that has to come during the “realignment process.”

But those appear to be the two choices: allow failure, which allocates resources from the bad debts and losers to those who can produce real wealth. Or, try to “stabilise” any inherently unstable situation (perpetuating asset values after the credit spigot has been turned off).

Not that we’re absolving market institutions for getting us into the problem. The credit ratings agencies essentially sold investment grade ratings on issues they didn’t or couldn’t understand. AIG sold default insurance on CDOs to make an easy buck. It’s now become a black hole for taxpayer capital.

But that is fictitious financial capitalism at work, or at waste if you prefer. That kind of financial capitalism is dead, and good riddance. But don’t mistake that episode of mismanagement and theft for conclusive proof that “capitalism” has failed. That would be a big mistake.

But the commies are feeling their oats these days. Yes, the commies are back in the DR mailbox. They’re in the paper. They’re even on TV. We saw a report on them last night and how their explanation of the financial crisis validates what they’ve been saying all along.

Regards,
Dan Denning

February 26, 2009

Here Come the Commies: Marxism Goes on the Attack was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.