« Max Hastings Turns Pessimistic on Iraq | Main | Social Security Resources »

January 19, 2005

Am I a Secret Austrian?

Tyler Cowen outs me:

Marginal Revolution: If I believed in Austrian business cycle theory:

1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates.

2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.

3. I would think that we have piled on far too much debt, in both the private and public sectors.

4. I would think these trends cannot possibly continue.  Asian central banks may come to their senses.  Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix.  This, of course, would eventually prove impossible.

5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports.  Furthermore I would think it will not handle such an unexpected shock very well.

6. I would buy puts on T-Bond futures and become rich.

7. I would think that Hayek's Monetary Nationalism and International Stability, now priced at $70 a copy, is the secret tract for our times.

Of course that is not me.  But at least someone appears to believe in Austrian business cycle theory.  By the way, here is one summary of the theory, although I do not agree with the characterization in all respects.

I can only plead that my Austrian tendencies are small and (usually) under control. Most of the time I'm a straightforward Keynesian aggregate-demand guy: i.e., get the level of aggregate demand right and most other problems will go away. But the U.S. fiscal deficit, its reflection in the balance of trade, and the... interesting policies of Asian central banks produce problems that cannot be analyzed as either too much or too little aggregate demand. The Austrian theoretical framework thus seems to be the only tool at hand. And when all you have is a hammer...

Posted by DeLong at January 19, 2005 11:00 AM


You and Roubini and Setser, all Austrians, then.

[And we never knew!]

Posted by: P O'Neill at January 19, 2005 11:54 AM

it is politically impossible for the Fed to raise rates to a point where they cut imports, for the resulting hard rescission would destroy bush and the republican party.

there is only one option and that is letting the dollar fall and fall and fall, until Europe is as crushed economically as are we.

Europe hasn't done the rust belt thing yet. it still has factories open that long ago should have been closed due to China and Asia. The falling dollar will close those factories.

Last, we are not in a residential real estate bubble. Our aggregate wealth in real estate is high because of all the capital lost with all the factory closings in the last 20 years. Second, houses, in the short run, are just bonds--they are the visible picture of bond (mortgage) which has most of the value. As interest rates drop, the cost of houses goes up, especially when they are taxed as a capital gain, for the yield of the mortgage is going up. simple math.

the lack of income is what will cool off the housing market.

Posted by: Moe Levine at January 19, 2005 12:01 PM

I track with Moe right up until the end; it will be, not lack of income, but personal bankruptcies which will kill the housing market.

Posted by: Melanie at January 19, 2005 12:57 PM

... all problems look like nails?

Posted by: aretino at January 19, 2005 01:05 PM

Moe Levine wrote, "Our aggregate wealth in real estate is high because of all the capital lost with all the factory closings in the last 20 years."

My first reaction: ???

My second reaction: most of the value in real estate is NOT capital (the building and other improvements) but rather in the land. So there's no "wealth" there in the conventional sense, just increasing Ricardian rents as demand heats up.

Posted by: liberal at January 19, 2005 01:09 PM

Then, the gist of the post is that debt whether internal or external does not matter much. The economy is growing nicely as the Fed confirmed this day, so stop worrying about whether the Bank of Japan will keep buying American debt and just focus on economic growth. Curious, conservatives who worried for decades about debt are suddenly free of worry. Liberals however are the gloomy group fretting about debt to their own political disadvantage.

Posted by: lise at January 19, 2005 01:22 PM

Both Austrians & Keynsians agree that money supply should be in line with productivity. Keynsians think a well managed government can do this best by manipulating the money supply. Austrians think there ain't no such animal (which leaves them open to having the money supply manipulated by somebody finding more gold - this hasen't happened lately but is what drove the inflation of the 16thC & may well do so again when we start mining the asteroid belt).

Posted by: Neil Craig at January 19, 2005 01:24 PM

OT: Recently I've read an article from one of my blogs in bloglines that describes the "Oil Curse" as an expected application of comparative advantage, then extends that reasoning to argu the less developed nations have a permanent comparative advantage in non-industrial sectors of their economies and shouldn't be expected to ever develop.

Now I can't find that article in any of several searches of google, bloglines and econlib.

Has anyone else seen the article and care to post a link?

Posted by: Rod Stallworth at January 19, 2005 01:26 PM

Is Prof. DeLong buying puts on T-Bonds? If you can answer this one, the other questions are scarcely relevant.

Posted by: Paul Callahan at January 19, 2005 01:27 PM

The Austrian theoretical framework thus seems to be the only tool at hand.

Well, who's in charge of fashioning a better tool suitable to the task at hand? I would have thought that would be what economists in academia do. Not being snarky, here...

Posted by: some guy at January 19, 2005 02:07 PM

> Curious, conservatives who worried
> for decades about debt are suddenly
> free of worry.

Don't kid yourself. The guys that were worried before are more worried than ever, but since it is one of their "own" racking up the debt they have managed to supress their own reactions to it.

Just imagine if this policy were being run by President Gore. Ha.

Posted by: Alan at January 19, 2005 02:16 PM


Then what is it that has made conservative economists give way on principles so easily? They go against everything they used to espose with no qualm.

Posted by: Ari at January 19, 2005 02:32 PM

OK, I've seen comments about Ricardian rents several times, but I don't understand the concept. Can anyone explain this economic idea in a couple of sentences to a humble Finance guy?

Posted by: Keith at January 19, 2005 02:33 PM

What are 'Austrian' tendencies...? Schwarzi?

Posted by: Pancho Villa at January 19, 2005 02:53 PM


Ricardo's account of rent was roughly as follows: if two sets of land, one highly fertile, one less so, are both needed to meet the consumption demand for their produce, then the price of the produce will be set by its cost of production on the less fertile land, the difference between the price of the produce and the lower cost of production per unit on the more fertile land being extracted as a different rate of rent on the two sets of land. So "Ricardan" rents are a positional windfall, not due to any greater input of effort of investment, but due to holding title in a position advantaged by an overall market. The same sort of thing would apply, e.g., to the cost of extracting petroleum in , say, Russia vs. Saudi Arabia, or would occur in various forms in real estate markets. Hence proposals to design taxes on "Ricardan" rents, since, while they will inevitably occur, they represent no increase in the deployment of labor or capital.

Posted by: john c. halasz at January 19, 2005 03:19 PM

What's interesting is that national structures of debt aren't good at anticipating or hedging against exchange-rate shifts. Though there's no U.S.-administered peg, in some ways the current U.S. situation is similar to the buildups of borrowing for nontradeds that you see in countries with pegs plus RER appreciation. And one of the obvious explanations, which an Austrian would spot, is gov't efforts to encourage certain kinds of borrowing, e.g. mortgages in the U.S. Anyway I see no shame in using Austrian ideas -- you don't need to buy into the more libertarian/Polyannaish aspects of this heterodoxy to take advantage of the fact that Austrians have thought seriously about time and capital. Post Keynesians (as opposed to hydraulic Keynesians, with which Brad now seems to be identifying himself) have made a few contributions along those lines too.

Posted by: Colin Danby at January 19, 2005 05:03 PM

Though I have read Tyler Cowen's point several times, I am not sure what to make of them. Is federal debt of not concern even in an economy with low levels of household saving? Is foreign debt of no consequence? What am I missing?

Posted by: anne at January 19, 2005 05:13 PM

Moe and company,

Alan Greenspan at the beginning of last year advocated that homeowners switch to ARM's. We then see a push by many mortgage companies to have people either when buying homes or refinancing, to go to "interest-only" ARM's. Buy a much bigger house, and a much smaller payment. We all "know" that houses will continue to go up in price! But let's say, Mr. Jones, does an interest only ARM. A housing bubble hits, and his home value, that he financed for $400,000 goes to $320,000. As long as he stays employed, he might be safe. But if a recession hits in 2006, or 2007, and he gets laid-off or fired, oh boy, what fun! The house of cards falls down. Anyone else see this as a problem?

Rd. Chrysostomos

Posted by: Chrysostomos at January 19, 2005 05:15 PM

Liberal misses my point--

a working factory is a productive asset, a capitla asset--its shows up somewhere in the national balance sheet. When you shut a factory your assets decline. We have shut so many factories that it has materially impacted our national balance sheet.

the percentage of our wealth in homes goes up because the percentage in factories has gone down. Day-to-day its called that writeoffs, like the ones just taken by GM--with lots more to follow.

Posted by: Moe Levine at January 19, 2005 05:43 PM


Morgan Stanley economists are arguing there is reasonably small risk of widespread credit problems stemming from the housing market.

Posted by: anne at January 19, 2005 05:47 PM


Markets at Risk, Economy Resilient
Richard Berner and David Greenlaw

Unlike their UK counterparts, for example, most US consumers have paid up for insurance against rising interest rates with fixed-rate mortgages. Despite the talk about an incipient 'ARM squeeze' in the United States, 75–80% of the stock of mortgages is fixed-rate, and of the other 20–25% that is adjustable, about half is ‘hybrid’ with rate protection of 3–7 years. And even true ARMs have periodic caps that limit annual rate increases to 200 bp....

In contrast, US consumer lenders are exposed to rate and credit risks. The consumer has three puts back to the lender, and we believe that lenders typically underprice those puts in their eagerness to book income. There is an interest-rate put: Lenders (including investors) profit from the premiums that consumers are willing to pay to finance with fixed rates. But the value of those options falls, and financing costs rise, when rates go up. There is a “refi” put: Consumers can refinance at low cost, but lenders bear the optionality risk in both directions when rates change. And there is a credit put: Overleveraged consumers may suffer financial consequences, but the average consumer suffers little. But for the lenders, the tails matter; they suffer the income loss on nonperforming assets and the principal loss on default. And lenders suffer from adverse selection when better credits pay down debt.

Posted by: anne at January 19, 2005 05:51 PM

Alan Greenspan had nothing to do with the spread of ARMs in home lending. They spread upward from the subprime market, where monthly payments rule the day. Many people have been encouraged to buy based upon the maximum that they could afford in monthly loan payments (forget about saving for maintenance). I have seen this occur accross all economic levels from from crappy houses to luxury new builds (and don't get me started on condos). The problem does not occur when someone gets laid off, but when interest rates go up. All of a sudden those who had already maxed out their monthly budget find themselves having to pay more. Smart people are switching to fixed rate. As interest rates go up, I have a feeling that personal bankruptcies will rise significantly due to this phenomenon. This problem will be the worst in the bubble areas in SoCal, NorCal, Chicago suburbs, Boston and probably anywhere else there has been rapid home 'value' appreciation in the last five years.

Posted by: AnotherScott at January 19, 2005 05:55 PM

I respectfully disagree with Berner and Greenlaw. The issue around ARMs relates not to the STOCK of such debt or to the income effects associated with a rise of interest rates on that stock. For the household sector, the income effects of higher interest rates are positive. That fact is as obvious as it is beside the point.

The issue around ARMs relates more to the FLOW of aggregate demand that is financed via borrowing in them. That flow is currently quite elevated, and any developoment that interrupted it might level a major shock to aggregate demand growth. This may or may not be a serious issue. In my view, it is at least a legitimate worry. But Berner/Greenlaw's points about the stock of mortgage debt and associated income effects do not address the relevant question. They are true but largely irrelevant.

Posted by: Gerard MacDonell at January 19, 2005 06:30 PM

Ari asked:

> Then what is it that has made conservative
> economists give way on principles so
> easily? They go against everything they
> used to espose with no qualm

I am supposed to know the reason for this how? I have no inside track into their brains. But this is what they have done, just going by what they have said in the past and what they say now.

Much of what I process on this topic comes from reading this blog, Paul Krugman, and a handful of others. I remember one particularly eloquent posting here by Prof. De Long here about Glen Hubbard -- perhaps almost two years ago.

That was in response to a case where Hubbard actually took a position on behalf of the Bush admin contrary to an economics textbook of which he was an author! Prof. De Long pointed out how, that once you do that, they know you are bought and can be counted on to say nearly anything. In some cases it appears to be absolutely anything.

So the question is not best put to me. It is best put to them.

Posted by: Alan at January 19, 2005 07:49 PM

Conservative economists have given way on principles so easily because the small government philosophy was not really conservative economics at all. It was minority party tactics; now that Republicans are no longer the minority party, the tactic can easily be discarded. And now Democrats have picked it up themselves.

Conservative economic theory has long been about keeping the elite the elite. Through attacks on public education (public schools, decreasing Pell grants), and through abolition of taxes on investments and dividends, of the estate tax and of a progressive system of taxation, among other approaches, conservatives seek to preserve the high status of their families for the future. Protecting the family nest egg and more importantly the status that comes with it from the machinations of the free market is the raison etre of conservative economics. Debt is no problem, just as long as the riff-raff has to pay it off.

Posted by: Glen Bowman at January 19, 2005 08:43 PM

"4. I would think these trends cannot possibly continue. Asian central banks may come to their senses. Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix. This, of course, would eventually prove impossible."

As long as American consumers continue to buy cheap Asian goods, our codependent relationship will continue. Its in the interest of China and other Asian countries for it to continue, however insane it may be.

The real question to ask is what will be the wrench in the gears of the American consumer spending spree?

It could be the bursting of the housing bubble(s). It could be another massive terrorist attack on American soil. But I doubt that these or any other near term external shock will do the job.

The real takedown is coming in the latter part of this decade, or the first half of the 2010s, when between 77 and 100 million baby boomers begin to retire, and they are replaced by 40-60some million generation xers in middle age - the peak spending years. You can't have that kind of demographic bust without serious consequences for consumer spending, and when consumer spending begins to stagnate, and even more likely fall, our Asian banker friends are no longer going to be inclined to feed the addict.

Marginal Revolution, in the linked post, questions the cornerstone of this logic:

"3. China and Japan want to keep the value of the yuan and yen low, as part of a mercantilist export-promotion strategy. I take this to be the standard wisdom. I"m certainly not dismissing it, but I do have a few questions. Aren't there easier ways to subsidize exports? Why are exporters the dominant interest group here? Isn't a country wealthier when its currency is stronger in real terms?"

There are of course other ways to subsidize exports, namely subsidies, which are a factor here as well as currency manipulation. But that doesn't mean they're necessarily easier in this day and age, which is to say politically easier. Since the collapse of Bretton Woods the US has tolerated massive monetary protectionism year after year on the part of Asia (first Japan...then China, India) and while massive, naked subsidies are likely to provoke a backlash in Washington, currency manipulation is a more discreet version of protectionism, although no less insidious or illegal.

Posted by: Robin the Hood at January 19, 2005 10:58 PM

Then what is it that has made conservative economists give way on principles so easily? They go against everything they used to espose with no qualm.

Because the first rule of Conservatism is, "Liberals are so heinous that anything we do to keep them from power is justified and necessary."

Posted by: Kimmitt at January 19, 2005 11:53 PM

Why would an Austrian malinvestment boom show up only in the market for housing and not as a boom in plant & equipment investment? I suppose you could trick up some time-of-production and age-of-capital argument, but I think that it's the lack of such a boom which drives a wedge between the Austrian and (post-) Keynesian views here; it seems clear to me that the imbalances in the US economy are a result of weak animal spirits rather than misleading monetary signals.

[Do we have to order one or the other? Can't we order all--weak animal spirits and misleading monetary signals and insane fiscal policy?

Posted by: dsquared at January 20, 2005 01:45 AM

"Why would an Austrian malinvestment boom show up only in the market for housing and not as a boom in plant & equipment investment?"

The perfect question. There is no reason to believe monetary policy has been faulty. The Fed lowered interest rates in dramatic fashion from January 2001 in an attempt to lesson the effects of a slowing economy. The result was dramatic real estate investment and a vibrant consumer durables market that bouyed the economic from then till now. The problem has still however been to little corporate investment and this can be blamed on fiscal policy that while giving us a fierce structural deficit was largely focused on tax cuts that have had a relatively minor effect in stimulating demand.

Posted by: anne at January 20, 2005 02:54 AM

American fiscal policy is not set in China, but here. We have needed a fiscal stimulus that was designed to increase domestic demand and investment, but that we have not had. Indeed Japan and China and Brazil and other countries have helped keep our interest rates low and assisted the Fed in policy. Fiscal policy is the problem, not Brazil.

Posted by: anne at January 20, 2005 04:18 AM

Ie: we tried to "fix" deeper economic woes by keeping interest rates below the rate of inflation. You can't do this forever and forever. This is why real estate inflated so rapidly. It is a pure debt driven market, ie, if you have no debt machine, the price of property collapses.

The buying spree created by debt cheaper than solvency has created many debt dependent jobs such as huge retail job growth as well as building growth as the land is exploited to access the debt machine fueling the economic boom.

This can't go on forever, it ends in mass bankruptcy. Our government and our people and certainly the banks will go bankrupt in tandem. 1929 comes to mind here.

Posted by: Elaine Supkis at January 20, 2005 04:22 AM

At least you keep the most excellent company, Brad.

This from the second-richest man on the planet (estimated net worth, $41 billion), and, quite possibly, the greatest investor the world has ever seen.

WASHINGTON (AFX) - The dollar cannot avoid further declines against other major currencies unless the US trade and current account deficits improve, Berkshire Hathaway Inc chairman Warren Buffett said

"I think, over time, unless we have a major change in trade policies, I don't see how the dollar avoids going down," Buffett, the world's second-richest manl told CNBC television

"I don't know when it happens. I don't have any idea whether it will be this month or this year or next year, but we are force-feeding dollars on to the rest of the world at the rate of close to a couple billion dollars a day, and that's going to weigh on the dollar." Buffett noted the record US deficit of 164.7 bln usd in the third quarter of 2004 in the current account, which measures trade and investment flows.


I wonder how much Mr. Cowen has made from his various prognostications? Less than $41 billion, do you reckon?

Posted by: Jake at January 20, 2005 05:13 AM

Moe Levine wrote, "Liberal misses my point--...the percentage of our wealth in homes goes up because the percentage in factories has gone down."

No I didn't---you mistated it. In your first post you didn't refer to the *relative* amount of wealth in the housing sector, but the *absolute* value.

Posted by: liberal at January 20, 2005 05:57 AM


To add to john's comments:

Here are a few useful Wikipedia articles:

In classical economics, there are three factors of production: labor, capital, and land. ("Land" is taken to refer to all natural resources, including minerals, water, E-M spectrum, etc.) The incomes from these are, respectively, wages, interest, and *rent*.

As john describes, Ricardian rent is due to differences in the "value" of different plots of land. When agriculture was a larger fraction of the economy (and especially before modern ag techniques), this difference was often thought of in terms of relative fertility. These days, most Ricardian land rent depends on the location of a parcel. Obviously, an acre of land in downtown Manhatten is worth far more than an acre in my home state of Iowa. Or, as people like to say, the three most important factors governing (urban) land price are location, location, and location.

Land is different from the other two classical factors of production, because it is finite (cannot be increased in quantity) and naturally endowed (created by no one). Thus, for example, most economists agree that taxes on the unimproved value of land cannot be passed on to tenants (above and beyond what the tenants are already paying the landlord). The collection of arguments that the first, best tax government should use is that on land is usually known as "Georgism," after the self-taught American populist economist, Henry George, who pushed this point of view in the late nineteenth century.

Two well-written pages on the political economy aspects of this (written from a (geo) libertarian perspective, which I myself don't fully share, especially the (strict Georgist) notion that there should be no taxes *except* those on land), see:

Posted by: liberal at January 20, 2005 06:14 AM

lise wrote, "The economy is growing nicely as the Fed confirmed this day..."

That's a plausible assertion. But some (e.g. PIMCO's Bill Gross) have come to question the inflation adjustments put in place by federal statistical agencies in the 1990s.

If you don't use those adjustments, inflation is higher and GDP growth is therefore lower. That's much more consistent with the cruddy labor market.

Posted by: liberal at January 20, 2005 06:50 AM

Debt is no problem, just as long as the riff-raff has to pay it off.

Actually, conservatives love government debt. It is a great tool for hurting the riff-raff, as opposed to properly structured taxes, which they would have to pay.

Posted by: Moe Levine at January 20, 2005 06:56 AM


"The problem does not occur when someone gets laid off, but when interest rates go up. All of a sudden those who had already maxed out their monthly budget find themselves having to pay more."

That was my other issue with this whole thing. I didn't make that clear in last post. Greenspan advocates ARMS in Jan. 04, and from my reading, WAMU for example did a considerable amount of ARM's, largest% ever. The thing that gets my goat, is why Greenspan would advocate such a thing, when he "knew" that the Feds would most likely be raising short-term rates. A year later and we see that they have! Now we have a couple of years until those ARM's adjust upwards (3 yr), maybe longer (5 yr), but what of home equity loans? Another issue entirely. Inverted yield curve seems to be coming...? Then a recession in 2006, 2007? Some clients and colleagues of mine in mortgage industry, point out the use of ARM's, especially "interest-only" being used quite frequently. In California, about two months ago, survey was done in which 1 out of every 4 citizens stated they were thinking of moving out of state as they didn't think they could afford to live there. Prices on homes were too high. One benefit living in Washington State, at least for us, is that Californians will move from there to here. Our housing prices are shooting up, and will shoot up more as they continue to discover the "low price" (hah) of homes here, compared to there.
Add that to the debt levels of the average american and it's as if, the Fed's are trying to fund the economy via refinancing until the economy turns around. That's the way it seems to me. Looking for furthur input.

Posted by: Chrysostomos at January 20, 2005 07:23 AM

The Fed did just what it had to from January 2001 by lowering interest rates in dramatic fashion to stimulate a rapidly slowing economy with no threat of inflation. That Fed rate cuts stimulated the housing and consumer durables markets more than business investment is no fault of the Fed or its policy. We needed a fiscal stimulus in addition that was aimed at bolstering consumer demand further and business investment. We got tax cuts that had too limited an effect in raising demand.

Posted by: anne at January 20, 2005 08:04 AM

Though the Fed was too rash in tightening by half a percent in May 2000, when a tightening sequence had been well underway and there was no sign of inflation and the stock market had begun to decline, Fed policy strikes me as remarkably sound from Paul Volker on.

The problem we have now stems from a gratuitous set of tax cuts that have left us with a severe limit to federal revenue. We turned a remarkable surplus to a fierce deficit, but did not even use the tax cuts to create an adaquate demand surge.

We have a significant federal deficit and limited household saving. Then, the deficit must be funded in some manner and international capital flows to America is the manner of deficit funding. Though I have no idea how the problem will play out, I know we must either have a fresh approach to fiscal policy or there will be ever growing pressure on the dollar. Where is the mystery?

Posted by: anne at January 20, 2005 08:07 AM

If those who buy our nation's debt every Monday demand higher interest rates to compensate for the increased risk of lending to a financially reckless world power, there will CERTAINLY be some problems for those who are borrowing money without a fixed rate (credit card, some mortgages). I keep an eye on the 10 year bond and am surprised how well it has been holding up. Still, I don't think that holding government bonds--at least those issued by the US--for the long term is prudent: instead of risk-free returns, you are opting for return-free risk, imo.

Posted by: Glen Bowman at January 20, 2005 09:19 AM

If the US balance of payments deficit is real, that is, if we really do owe the rest of the world more than they owe us, and if it is not politically possible for the rest of the world to let the US export it's way back to balancing it's imports and exports, then what happens when it all comes crashing down?
Buy Imperial (pre 1912) Chinese bonds.
We will owe the Chinese lots of treasury bonds. We won't be able to export enough tv sets or whatever to pay them back. So the US government is going to have large quantities of money with no obvious owner.
So they can compensate the people (old money rich people) with this money by making good on the old Chinese (pre 1912 Imperial bonds) debts with new Chinese (post 2000 treasury bonds) assets.
If you can find and buy these bonds (which haven't paid interest or principle in 90 years) you will have an interesting investment.
If you can't find and buy these bonds (which haven't paid interest or principle in 90 years) that will be interesting in itself...

Posted by: walter willis at January 20, 2005 10:45 AM

John and Liberal,

Thank you for the education. I read through the URL's that Liberal provided and it was interesting. I had no idea that there was such a variety of thoughts on how land ownership should be viewed.

Posted by: Keith at January 20, 2005 11:25 AM

"Why would an Austrian malinvestment boom show up only in the market for housing and not as a boom in plant & equipment investment?"

Maybe because the business leaders who would have to make the plant and equipment investments are still recovering from malinvestment in the 1990s. Many, many companies wildly overinvested in technology in the 1990s. Their balance sheets are still recovering. Reducing interest rates isn't going to make them expand their factories if the factories are currently operating under capacity.

Unfortunately, residential real-estate investors and fixed income hedge fund managers (who often use a lot of leverage in their strategies) weren't burned in the 90s and are less risk averse. Artificially lowered interest rates might well have more impact on their decisions.

Posted by: msullivan at January 20, 2005 11:54 AM

"Why would an Austrian malinvestment boom show up only in the market for housing and not as a boom in plant & equipment investment?"

Because housing is an appreciating asset, usually, & equipment is a depreciating but profit improving one & housebuyers are more convinced that money is going to depreciate than manufacturers are that they are about to have profits to improve?

Posted by: Neil Craig at January 20, 2005 02:01 PM

Okay all you budding "economists", I have a question for you.

I just posted an excerpt on my blog and wanted to get your input:"Christian economist Larry Burkett tells us that, in 1929, 95 percent of homes were bought for cash and only 5 percent were mortgaged. Today those figures are completely reversed with 95 percent of homes being mortgaged! Before 1945, practically no cars were financed — it was considered unthinkable, even immoral."

I am going on the basis that the above information is factual. Comparing then, to now, in less than 100 years, American seems that it is headed down a slippery slope. No, I am not trying to be "chicken little", but am always trying to keep a realistic viewpoint, especially in regards to the economy. Having said that. With the introduction of income tax, and the federal reserve, what will it take to turn this thing around? A depression? Is the economy, truly cyclical and that booms and busts take place every 60 to 100 years. Not trying to be ignorant, but I am truly concerned about our nation, its economy and the path that it seems headed down is not the right one! Anyone want to respond, or give me some "rose-colored" glasses to wear so I can "see more clearly"? :)
Looking forward to your responses.

Posted by: Chrysostomos at January 20, 2005 02:26 PM

And how are Christian economists different from all the non-Christian types? And, should I apologize to whom for having a mortgage?

Posted by: Jenna at January 20, 2005 02:43 PM

"And how are Christian economists different from all the non-Christian types? And, should I apologize to whom for having a mortgage?"

I just cut and paste the excerpt, but I would surmize that the individual is an economist who views the economy on the basis of Christian principles.

As to apologizing to whom for having a mortgage? I don't know where that came from? How the two equate, I dunno.

What is interesting is the selective nature of comments like these....

Say that I am an Asian-American. Why can't one who is of Asian nationality just use American. Do I need to apologize for being just an american? Or what about if I was a Gay Activist. Why not just label oneself an activist? I could go on and on. Is it wrong for this individual to identify himself as a Christian Economist? How is that different from supply-side, or any other form of economist?

Posted by: Chrysostomos at January 20, 2005 03:13 PM


You are right, and I was foolish to be snippy. Anyway, we do live a whole lot better now than in 1929 credit notwithstanding. Is there cause for concern however? Surely. No more snippy comments from me.

Posted by: Jenna at January 20, 2005 03:42 PM


Thanks for you posts.

Posted by: Jenna at January 20, 2005 03:57 PM

Chrystomos, in 1929 most people didn't own their homes and in 1945 a much smaller percentage of the population owned automobiles; it was through the system of lending that people could acquire them.

Posted by: Randolph Fritz at January 20, 2005 07:20 PM


There can be Christian economists in the same way there can be vegetarian economists – vegetarians and Christians can practice economics, but neither vegetarianism nor Christianity informs positive economic. Christianity is purely normative, vegetarianism often so. We should not expect that Larry Burkett can tell us more (or less, if he keeps his norms out of his analysis) than other economists about the behavior of the economy, simply because of his faith. If it once was considered immoral to buy a car on credit, that may help explain why fewer cars were bought on credit then, but says nothing about the risks and benefits of auto loans in today's economy.

There are lots of reasons to be concerned about the US economy, but I wouldn't worry too much about the notion of 60-100 year cycles. If they exist, the slippage between 60 and 100 years covers the better part of most working lives. If you sit around looking for the onset of a 60-year cycle, but are wrong by 40 years, you'll miss a lot.

More compelling, I think, are the obvious changes going on right in front of us, right now. The richest country in the world is growing more indebted every day, with the willful encouragement of the ruling political party. Important forms of retirement savings that served earlier generations well are eroding rapidly in the case of pensions, or are under threat of unnecessary erosion in the case of Social Security. (These two problems seem related to me.) Nearly all the richest countries face demographic troubles that ripen quickly over the next few years. The most populous countries in the world are growing very rapidly, and raising their citizens out of poverty, by shedding damaging economic policies, and by catering to our desire to consume today, rather than save for tomorrow. And good for them, but..energy costs have risen lately for reasons that, unlike in the 1970s, seem to have little to do with intentional supply restrictions. With China, India and several of their neighbors growing fast, energy demand is also growing apace, while is questionable. The entire period of rapid industrial and post-industrial per capita output and income growth has been fostered by growing availability of energy.

These are just a few pet concerns of mine - oh, and global warming could screw things up in ways that no amount of last-minute behavioral adjustment could remedy - so no, you are not alone in wondering if there is trouble ahead.

Posted by: kharris at January 20, 2005 07:22 PM

kids, viewing world events through an economic prism is like being in bed with, let's say, oh , heck, take your pick (checkout girl, the lifeguard, the celebrity) and getting it on (somewhat, eh?) and thinking it be about anatomy and physiology......

you're right, but it ain't really the way that it works......

and we have no excuse for collectively forgetting the past and the future world history -- and how recent cataclysms were only peripherally connected through economics......

Misguided emphasis on irrevelant science = jacking off.....

time to crack some relevant political theory -- how about a posting or two? no need to suggest specifics here --just that Greenspan, Buffet, Soros, don't qualify.....

you ever remember trying to get the very big picture, maybe in school? well, then talk about that, even hesitatingly......

without the canvas, it's just paint. paint a picture, then talk about the price of paint.

Posted by: LarryKingLovesDots...Spotrevoc at January 20, 2005 07:51 PM

For those seeking a weekly fix of Austrian economic theory should stop Friday evenings (sometimes Saturdays) at prudentbear.com to read Doug Noland's "Credit Bubble Bulletin." Noland is a Ph.D. student (candidate, by now?) studying Austrian theory. Consider it a weekly rehash of the week's economic news--Austrian style.

Posted by: Glen Bowman at January 20, 2005 10:30 PM

Chrysotomos link goes not to an email, but to a website/blog.
In 1929, a majority of houses were mortgaged. Today, a majority of houses are mortgaged. The last time a majority of houses in the US were not mortgaged was when they were made of logs.

Posted by: walter willis at January 20, 2005 10:42 PM


The richest country in the world is growing more indebted every day, with the willful encouragement of the ruling political party. Important forms of retirement savings that served earlier generations well are eroding rapidly in the case of pensions, or are under threat of unnecessary erosion in the case of Social Security. (These two problems seem related to me.)

Nicely stated, as always. And, most worrisome.

Posted by: anne at January 21, 2005 04:22 AM

Brad should take some time to read Minsky and a few of the articles at the Levy Institute. Don't take me wrong, I'm open minded enough to concede a few good points in Austrian Business Cycle theory. But here's the rub. The part that I like (essentially an argument about over investment in capital and too much debt piling up) always blames the crisis on "too much money". Money matters for the Austrians, but only in a bad way.

Of course Minsky and other Keynesians who understood Keynes (money matters and not **just** in a bad way) have published quite a bit on how these cycles of overinvestment, too much debt followed by crises is generated endogenously by the cycle of accumulation-not by evil central bankers.

Kindleberger examined this whole debate in his classic "The World in Depression" and to my satisfaction (OK admittedly my threshold on this issue is low) demolished Rothbard's explanation for the Great Depression.

So why oh why are we ruled by the mainstream straightforward, aggregate demand-money does not matter Keynesians?

Posted by: Chip Poirot at January 21, 2005 04:57 AM

Hayek's essay is available in this book


at half the price - follow the Amazon link at the bottom.

Posted by: shinypenny at January 21, 2005 05:21 AM

Chip Poirot

Nice points. Thank you.

Posted by: anne at January 21, 2005 06:48 AM

The fact that property, particularly high value land property, can be financed by mortgage is a source of strength not weakness.

One problem for the 3rd world is not that they have no monetary assets but that the infrastructure to allow people to borrow against land assets does not exist.

Posted by: Neil Craig at January 21, 2005 03:03 PM


A functional banking/lending system is prerequisite for an Economy to grow.

Unfortunately the problem is that the capitalist business cycle is a manifestation of over and under investment at different points in time.

It would seem that we are now at a point in the cycle where regardless of the interest rate, a great number of people would simply be unable to take on more debt. Blame stagnant wage growth, productivity, globalization, but the facts are there.

It is precisely because of our advanced lending practices that we have been able to compensate for the structural deficiencies mentioned above - but no longer.

The stubborn long end of the curve, TIPS spreads, anemic recovery, non-existant January effect, UK and Australian yield curves as well as our own, tumbling global housing markets...whatever you want to look at is pointing to the same thing.

The reemergence of deflationary pressures due to Global Recession by 2006. Deflation, not inflation is inescapable and almost necessary to finally clear the maladjustments accumulated since 1982.

Posted by: HedgeFundInvestor at January 22, 2005 05:53 PM


Thank you for your post.

Sadly, I have to say that my concern is exactly as you stated:"Deflation, not inflation is inescapable and almost necessary to finally clear the maladjustments accumulated since 1982."

Even more sadly, is that the average American, has no idea, as the media and others continue to play the "rally song" and keep the "sheep" in the market regardless. "Sheep" whom I hope will not be "shorn", nor led to the "slaughter". Odds are they will be one or the other. The "pros" will be talking out one side of their mouth, saying stay-in, while they themselves don the "lifejackets" and board the "lifeboats", leaving the average American to fend for themselves.

Posted by: Chrysostomos at January 24, 2005 11:54 AM

While eating lunch, I came upon this story - Central banks shift reserves away from U.S.

Here's the link:http://news.ft.com/cms/s/9ef63678-6d7d-11d9-9b69-00000e2511c8.html

Anyone care to comment?

Thanks ahead of time....

Posted by: Chrysostomos at January 24, 2005 12:58 PM

As a student of the Austrian school, it is refreshing that the ideas are actually considered, and not simply rejected as old-fashioned, miserly, etc etc.

A simple point I would make is that there can never be "good" creation of money and credit out of thin air. This process occurs by monetary debasement, monetary inflation, and the fractional reserve system. As Marc Faber says, if simply creating money and credit out of thin air could make you rich, then the countries of South America would be the richest in the world, as they've mastered that art. This process simply amounts to the redistribution of wealth, malinvestments, and the alteration of the production-structure to something not in alignment with underlying preferences.

The problem with aggregates is that they cover up important details. Aggregates, for example, will hide malinvestments; the common flaw is that many are looking for "overinvestment" in aggregates. However, what we are looking for is malinvestment, which is in the details. Someone I was arguing with said that since the market is rational, it will adjust to expected credit-creation, with some entrepreneurs under-investing, other's over-investing.

The problem here is that good invewstments don't cancel out bad ones. A malinvestment is a malinvestment. Simply because one entrepreneur invests less in anticipation, doesn't cancel anything out; it's just an investment not made (and is actually bad, because if he'd made an investment consistent with the underlying preferences of the market, he'd be using money most efficiently). See my notes on this, particularly the first two sections.

Obviously, for Austrian economics, Mises.org is the place to go (CATO.org is also ok, though their policy suggestions are often ill-advised). Someone mentioned PrudentBear.com, a great website. Another good one is FinancialSense.com.

Posted by: David Heinrich at January 28, 2005 10:59 PM

[comment spam]

Posted by: at February 1, 2005 05:14 PM

[comment spam]

Posted by: at February 9, 2005 01:05 AM

[comment spam]

Posted by: at February 9, 2005 01:07 AM