Friday, 28 November 2014

A Flawed Analysis Of What Ails The Economy

By Pater Tenebrarum

A Popular Meme, that Remains as Wrong as When it Was First Conceived

A recent article in the Guardian mocks JC Juncker's latest scheme to produce some €300 billion in "investment" with a magical money multiplication scheme. Naturally, we agree that Juncker's plan is deeply flawed, to put it as politely as possible. We have pointed this out already, even before he made the financing details known, which make very little sense.

The article also correctly notes that "QE" has not achieved anything worth noting. However, it is otherwise based on an utterly flawed analysis. The author pleads for "QE bombing" the citizenry itself, i.e., he wants central banks to print money and simply hand it out to everybody. A similar proposal has been made by several economists recently, in Germany and elsewhere. It follows on the heels of the just as absurd idea that central banks should simply "cancel" the government debt they have bought.

Something for The Week End: Austrian Economics Capital Theory & The Austrian Business Cycle Theory

New to Austrian Economics? Or simply need a refresher on Austrian capital theory and the business cycle?

Then, watch this lecture on capital theory...

...before you watch this lecture on the Austrian Business Cycle Theory (ABCT).

The two, Austrian Capital Theory and the Austrian Business Cycle Theory, are hand in glove and it's difficult to fully comprehend the latter without first understanding the former.

Then, round off your week end listening to Professor Jesús Huerta de Soto!

Russia’s Monetary Solution

By Alasdair Macleod

The hypothesis that follows, if carried through, is certain to have a significant effect on gold and the relationship between gold and all government-issued currencies.

The successful remonetisation of gold by a major power such as Russia would draw attention to the fault-lines between fiat currencies issued by governments unable or unwilling to do the same and those that can follow in due course. It would be a schism in the world's dollar-based monetary order.

Russia has made plain her overriding monetary objective: to do away with the US dollar for all her trade, an ambition she shares with China and their Asian partners. Furthermore, in the short-term the rouble's weakness is undermining the Russian economy by forcing the Central Bank of Russia (CBR) to impose high interest rates to defend the currency and by increasing the burden of foreign currency debt. There is little doubt that one objective of NATO's economic sanctions is to harm the Russian economy by undermining the currency, and this policy is working with the rouble having fallen 30% against the US dollar this year so far with the prospect of further falls to come.

Wednesday, 26 November 2014

The Money Relation Signals Decreased Inflationary Pressures

The Money Relation is pointing in the direction of a less inflationary environment in the U.S. as money supply growth slows and as the personal savings rate increased somewhat in October. The reading for the month, -44.5%, was a nine month low and represented the 10th month in a row in negative territory (suggesting money is becoming less "abundant").

As U.S. government deficit spending is shrinking (for now) and as the Fed ended QE3 in October, the money supply growth going forward is likely to continue to decrease. Unless QE4 is implemented shortly, only increased bank lending and security purchases by banks from the non-bank public can offset this likely reduction in the money supply growth rate. The Fed will however continue to roll over its assets and large proportionate purchases from the non-bank public might offset the decline in the money supply growth rate somewhat, though likely marginally. 

For now, the Money Relation is not pointing to an imminent economic collapse, but it is pointing in that direction. Do keep in mind that things can change quickly, as 2006 and 2008 demonstrated very clearly when the Money Relation as defined here also declined for ten consecutive months. 

The current development is certainly no good news for stocks, especially as stock prices and earnings are grossly inflated and reliant on further money supply growth in my opinion as I've tried to highlight in numerous charts and articles (e.g. here). 

Thrift? Who Cares, The Show Must Go On.

Personal consumption (spending) and saving data for October has just been released. Dividing consumption by spending gives us the consumption/saving ratio. For an economy to prosper longer term and for sustainable economic growth to take place, savings is an all important input. In fact, it is an absolute necessity - without savings there simply can be no real economic growth. The more savings, the more resources are available for investment purposes. 

Based on data for the U.S. going back to 1973, consumption has steadily increased compared to savings (i.e. the C/S ratio has increased). Having said that, the ratio was fairly stable for the 30 year period spanning 1973 to 1993 (the horizontal axis crosses at the 1973 to 2014 average of 14.47):

But then, starting around 1993, things started to change and towards the end of 1990s the ratio surged as Americans started spending a significantly bigger proportion of their income (and hence saved less proportionally). This contributed to the artificial economic booms and very real busts we've seen ever since. The chart below is constructed on the same basis as the chart above, but depicts the 1993 to 2014 period instead.

For the 1973 to 2014 period as a whole, the chart looks like this. 

Though the ratio is today nowhere near the insane levels preceding the 2008 economic collapse, it remains substantially higher than it was during the 1973 to 1993 period and also substantially higher than the long term average.* In this respect, politicians and economists (including Fed officials) believing consumer spending is what drives the economy and that good old fashioned thrift is to be avoided, has succeeded. If only they were right. Unfortunately, the only thing easy money and credit seem capable of producing is a manic-depressive economy resulting in lower living standards for most. 

Meanwhile, the show goes on at Wall Street as the stock market thrives on artificially low interest rates and an expanding money supply. 

Until thrift once again becomes an absolute necessity for the saving-starved U.S. economy.

As of October 2014

* Improved clearing systems, increased use of credit cards and perhaps more frequent salary payments than before are factors that reduce the need to hold cash and hence help explain part of the increase in the C/S ratio. 

A Bearish Hedge Fund Bets Against the Bulls and Still Profits

By Peter Eavis

The stock market has been rising for years, hitting new highs almost every week. So how is it that one of Wall Street’s most bearish investors can claim to have profited strongly over this period?

Universa Investments, a hedge fund founded by Mark Spitznagel, is one of the few firms that is set up with the aim of making money in an economic and financial collapse. In the market turmoil of 2008, Mr. Spitznagel earned large returns.

Large pessimistic bets usually lose a lot of money when stocks are rising, as they have ever since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30 percent return last year, according to firm materials that were reviewed by The New York Times. In comparison, the benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32 percent with dividends reinvested.

Insurance policies that pay out after disasters do not produce big returns when the catastrophe fails to occur. But since 2008, some investors have been looking for ways to ride the market higher while having bets in place that will notch up huge gains if the system teeters on the brink once again.

At Universa, Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends.

This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong — and when it evaporates.

“The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said...

Continue reading the article here.

Should Economics Emulate Natural Sciences?

By Dr Frank Shostak

Economists have always been envious of the practitioners of the natural and exact sciences. They have thought that introducing the methods of natural sciences such as laboratory where experiments could be conducted could lead to a major break-through in our understanding of the world of economics.
But while a laboratory is a valid way of doing things in the natural sciences, it is not so in economics. Why is that so?
A laboratory is a must in physics, for there a scientist can isolate various factors relating to the object of inquiry.
Although the scientist can isolate various factors he doesn’t, however, know the laws that govern these factors.
All that he can do is hypothesize regarding the “true law” that governs the behaviour of the various particles identified.
He can never be certain regarding the “true” laws of nature. On this Murray Rothbard wrote,
The laws may only be hypothecated. Their validity can only be determined by logically deducing consequents from them, which can be verified by appeal to the laboratory facts. Even if the laws explain the facts, however, and their inferences are consistent with them, the laws of physics can never be absolutely established. For some other law may prove more elegant or capable of explaining a wider range of facts. In physics, therefore, postulated explanations have to be hypothecated in such a way that they or their consequents can be empirically tested. Even then, the laws are only tentatively rather than absolutely valid.1
Contrary to the natural sciences, the factors pertaining to human action cannot be isolated and broken into their simple elements.

Read the rest here.

Tuesday, 25 November 2014

Global Irrational Exuberance Enters a New Phase

By Brendan Brown

The present global plague of asset price inflation — with its origins in Federal Reserve quantitative easing policies and featuring much irrational exuberance — is transitioning into a new phase. Some optimistic commentators suggest a benign and painless end to the plague lies ahead. They cite the skill of the Federal Reserve in “ending QE.” These optimists even suggest that meanwhile, controlled injections of new viruses of asset price inflation by the Japanese and European central banks could have a good outcome, and this justifies the risks of the procedure. None of this optimism is justified by the evidence, nor by the known pathology of asset price inflation.

Continue reading the article here.

This Stock Market Ratio is Now 14.2% Higher than in Q1 2000 and 45.0% Higher than in Q2 2007

And no, the ratio is not peaking due to historically low private investments as the current 10-year average hit an all-time high in Q3 this year.

Wilshire 5000 as of 24 November 2014

And this one does not look too good either...

Click here for more charts of the U.S. stock market bubble

Hayek, Statistics, and Trade-Cycle Theory

Austrian economics is often caricatured and criticized because of its approach, or deliberate lack of an approach, to mathematical models, multivariable calculus, and econometrics. Attacks are leveled against Austrians such as Mises, Rothbard, and Kirzner for their failure or refusal to avail themselves of applied empirical research in their scholarship. The Austrian methodology most frequently targeted is praxeology.

It is not the purpose of this short article to refute these attacks or to explore their errors and merits. That has been done ably by others (see, for example, the series of debate-essays available here, here, here, and here). Nor does this article attempt to stand up for the deductive reasoning of praxeology or to defend its claims about a priori truths, a task better suited for a lengthy work of scholarship, not a short article. This piece instead asks one simple question: does Hayek’s early work on trade-cycle theory complicate stereotypes about the methods of Austrian economics or clarify the manner in which Austrians can and do approach economic theory? The answer, of course, is yes.

Hayek proposed that the purpose and function of trade cycle theory was strictly limited: it was “to explain how certain prices are determined” and “to state their influence on production and consumption.” Expanding trade cycle theory beyond that purpose and function was, he believed, fallacious. “Any attempt to forecast the trend of economic development,” he claimed, “or to influence it by measures based on an examination of existing conditions, must presuppose certain quite definite conceptions as to the necessary course of economic phenomena.” But economic development — and the trade cycle in particular — is too important and complex to be guided by mere suppositions regarding matters about which there is much disagreement.

Saturday, 22 November 2014

Guess Who Has Been Spending An Ever Larger Share of U.S. Dollars During The Last 34 Years

The U.S. government of course, both Republicans and Democrats alike.

Friday, 21 November 2014

Whenever Monetary Inflation Outpaces Consumer Price Inflation....

...other prices will be pushed up instead as a result.

The Short Version of the "Austrian" True Money Supply (TMS), as of 10 November 2014

The short version of the Austrian True Money Supply for the U.S. increased 0.49% on last week for the week ending 10 November 2014. At $10.4324 trillion, a new high for the second week in a row, the money supply is now up $549.1 billion, or 5.56%, year to date.

The 1-year growth rate increased sharply for the week to 7.29%, up from 6.57% last week and the highest reported for five weeks. The growth rate however remains significantly lower than the 8.30% longer term average since 1980 and has plummeted since the +10% growth rate reported in early 2013.


Components of The Short Version of The Austrian True Money Supply


The Austrian True Money Supply
This weekly publication is based on a short cut version of the Austrian True Money Supply as some components are published on a monthly basis only and as the difference between the short and the "full" version is negligible. The two series can be compared as follows (as of October):

As the the charts demonstrate, the two series are close to identical on a monthly basis. It is also interesting to note that, on a monthly basis, both series expanded at the slowest year on year pace in October since November 2008. This observation should be viewed as an important supplement to the weekly comments in this report as it serves to further highlight the declining growth rate in the Austrian True Money Supply.

For monthly comments on the money supply, I suggest you have a look at the writings of Michael Pollaro. His latest report can be accessed here, here are two charts from that report:

A Leading Economic Indicator and The Stock Market - Disconnection Taken To New Highs

Can it really be the case that the stock market is independent of economic developments? I admit, I'm starting to sound a bit like a broken record, but better safe than sorry. The truth is yes, the stock market can act independently for a while as low interest rates and an ever increasing money supply channels return-starved funds to the stock market casino away from the more risk averse options. 

But the reality of the real economy hits Wall Street with a big hammer from time to time, knocking the stock market down to a more sensible relationship with the overall economy. Better be on main street and not Wall Street when that time comes soon again.