Thursday, October 15, 1998

Hebrew Rhetorical Device

Folks,
There is a rhetorical device in Hebrew where a point is made repeatedly, but
slightly different each time to further nuance the idea. Here is another
version of the argument I made....and my guess is the govt will take the
wrongs steps..if so, what is the correct counter-steps?
***This editorial, which ran in Investor's Business Daily, deals with the

Austrian theory of economic downturns. For a complete bibliography on the

subject of booms and busts, see the www.mises.org, click on "students" and

following links to "study guide."



Perspective

Investor's Business Daily

Tuesday, October 13, 1998



Austrian Advice



Everyone agrees that U.S. economic growth will slow greatly next year. It's

becoming more likely each day that the U.S. will go into a recession. So

what should the Federal Reserve and the government do about it?



Well, this question has been asked each time any country enters a recession.

But at no point in history was it asked with more urgency than during the

Great Depression.



John Maynard Keynes offered one answer. His friend and intellectual foe,

F.A. Hayek, offered a very different one.



At heart, Keynesianism is a theory of underconsumption. Economies fall into

recession, Keynes argued, when consumers don't spend enough and aggregate

demand falls. So the proper cure is to boost demand through government

spending.



Hayek stressed the role of monetary policy. Hayek, like his teacher Ludwig

von Mises, argued the roots of a bust lie in the preceding boom.



Credit expansion caused by excessive growth of the money supply lowers

interest rates, he said. This causes business to borrow more, build more,

and expand more.



But these artificial booms always come to an end, either when the central

bank raises interest rates to stop inflation, or when resources get

stretched too thin.



This "Austrian" theory says that recessions are a necessary healing process

for an economy, sort of like the hangover after a night of drinking. It's

when the bad investments of the artificial boom get worked out. The Austrian

prescription is for government to step out of the way and let the

readjustment take place.



This do-nothing approach didn't find many adherents. Keynes won that debate.



After the Depression, Keynes's followers argued that government spending and

manipulation of the money supply could even outwit the business cycle and

ease recessions.



But those ideas were successfully challenged by Milton Friedman, and

Keynesianism foundered during the stagflation of the '70s.



Both Friedman and Hayek won Nobel prizes in the '70s for their work on

monetary theory that challenged Keynes.



Meanwhile, Austrian-school economist Murray Rothbard looked back at the

Great Depression. He found that far from doing nothing, the U.S. government

pursued a policy of keeping wages and prices from falling.



That kept the economy from readjusting as needed. Rothbard argued that such

controls helped turn what might have been a fairly short, mild recession

into the Great Depression.



Now, once again U.S. policy-makers must ponder what to do in the face of a

global economic crisis.



Once more, there are calls to cut interest rates to forestall any recession,

and any day now, we may hear proposals to increase demand by raising federal

spending.



And once again, economists of the Austrian School, the intellectual heirs of

Hayek and Mises, are offering the same advice they offered in the '30s.



"The government should make sure that the banking system doesn't collapse,

and that the money supply doesn't shrink greatly, but apart from that, there

isn't much that it can do that would be of help," said George Reisman,

author of "Capitalism: A Treatise."



"In fact, anything else that it might do would likely interfere with the

working off of any malinvestments, and it could make matters worse," he

said.



So can government do nothing? Can't it at least free up the economy and make

it easier for it to readjust?



"Tax cuts and deregulation are always good ideas. But I'm not sure they can

be used specifically to counter downturns in the business cycle," said

Lawrence White, an economist at the University of Georgia.



The Austrians' approach would be tough to follow for politicians faced with

widespread unemployment.



Once more, it seems that policy-makers will have to grapple with how they

should respond to a global downturn.



The answer to that question depends upon how they view the nature of

recessions.



Are downturns caused by failures of demand? By outside shocks that hit an

economy randomly? Or are they rooted in past policy mistakes of central

banks?


Wednesday, October 14, 1998

Credit Crunch

Folks,

As I mentioned, my interest right now is an academic view of what is happening
worldwide relating to economics...What I teach works, but if I understood the
world economics better would I be able to tweak my techniques further? I suspect
so...so consider this an advanced seminar..although I am happy to take questions
like "how do I find a trucker to move my goods off the docks?"
Any way, I am taking a free web based econ course at www.polyconomics.com..and I
am not sure I agree with the instructor...he seems to be generally right..but as
far as I can tell, his thesis is, since the govts control the currency, lets do
a good job controlling it by watching the price of gold, and manipulating credit
and interest rates. On the other hand, I tend to prefer the Austrian
economicists who ask "Why do we have govt involved in banking to begin with?"
Well, with success USA previous to 1913, and Hong Kong as well...I wonder why we
do too.... At any rate, I think the Austrians tougher questions lead to better
analysis...and their reading (if I have this right) is the govt stimulated the
economy with cheap credit...cheap credit financed some bad deals on the
margin...those bad deals got to say 30% of the total, and is now
correcting..first in Asia, then Rusia, S. America and we are next....
Why didnt cutting interest rates a fortnight ago fix everything as promised?
because the good deals are fully financed, and more money will just go to bad
deals..so banks are taking their extra money and buying govt securites..a safer
bet...So what does this mean for the small biz int'l trader...? stick to the
principles I provided...products that solve a specific problem..compete on
design not on price..sell to the upscale stores...and look to the sellers to be
interested in backing you as long as you prove there is a market.
I have noted in economic downturns the upper end stores weather better than the
mid market...any way..I am sure as we muddle thru current events there is a a
strategy here unique to these times...we'll find it...on another note, plese
feel free to use this list..write a note telling us how far you've gotten with
your biz..what problems encoountered..experiences.questions..problems..
John Spiers