Saturday, October 30, 2010

The Fringe, Part II - Economic Heterodoxy

Hmmm.  I see you're back.  Lost something?  Oh, I see.  Thought you'd have another look around.  Well, how 'bout I give you the grand tour?  'Least the little area I know about, anyways, which ain't much really.

Mainstream Keynesianism and Economic Heterodoxy

The little part I know of just so happens to be the area lots of folks are interested in these days -- Economic Heterodoxy.  My little corner is the Austrian School, and it's the area I know best.  But I'm passing familiar with some other parts that you might wind up encountering, so I can give you some little idea of what's going on there, and why you should maybe steer clear of a few of 'em.

First the general lay of the land.  Basically, like the rest of the fringe, we're the mainstream's rejects, in our case, Mainstream Economic Theory.  Mainstream Theory, these days at least, is occupied by the Keynesians.  Like the other mainstream theories, the Keynesians pretend that they've always been there and claim all of established economic history as their own.  They go and mix in their own ideas with the older ones, and then talk about the whole gamish as if it's all one thing, not distinguishing their own theories from the Classical ones.  They don't even like it so much to be called Keynesians, because that name implies that dissenting factions exist.  Eggheads don't like controversy.  They'd rather people just do what they're told.

Funny thing is, those Classical Theorists whose theories are being held hostage by the Keynesians would roll over in their graves to hear how their ideas are being twisted and abused.  I can't imagine a single school of thought more opposed to the Classicists than the Keynesians, and here they pretend to be the 'saviors' of capitalism and the Classicists ideals.  What's that?  The socialists?  Hrmmph!  They at least don't pretend to give a whit about the thing they destroy!

Straddling the Fringe

Anyway, enough of the mainstream.  You've seen all that.  Bordering on the mainstream and sort of straddling the fringe are the Monetarists and assorted other schools, like the Supply Siders.  They barely get a respectable hearing in the mainstream.  The Keynesians have to put up with them just because their ideas are popular enough that they can't be silenced.  But the reality is, they're really not all that much different from the Keynesians themselves.  I've heard 'em called heretics of Keynesianism, which seems fitting to me.  They differ on a point or two, but mostly on ends and not means.  Fundamentally, their most basic assumptions are the same -- they accept the status quo as far as the fundamental financial institutions are concerned as being legitimate.  They just don't agree on the management.

The Half-Wits

Odds are, when you first wandered out of Mainstream, you passed on by those border regions and the first real Economic Heterodoxy you encountered were the Half-Wits.  Their sheer numbers would make it almost a certainty.  Ever since all that trouble started and put Mainstream Theory in question, we've had these folks traipsing all over, looking for answers piecemeal out here, and then setting up shop and making a hash of things.  They're mostly decent people and well-meaning, really, but goodness do they mix things up.

Take him for example.  Let's give a listen --

...Over the years I’ve been agnostic as to whether this depression would be inflationary or deflationary. Or both in sequence, with inflation first, followed by a credit collapse deflation; or a deflation followed by a runaway inflation. Or perhaps both at the same time, just in different sectors of the economy – e.g., prices of McMansions collapse because people can’t afford to live in them, while the prices of rice and beans skyrocket because that’s all people can afford.

At the moment I’m leaning towards a deflation in most areas. Why? Because the purchasing media in the U.S. is primarily credit based. If a mortgage defaults, what happens to the dollars it represents? They literally disappear, which is deflationary. If a bond defaults, the same thing happens. If stocks and property prices crash, the dollars they represent vanish. If people or businesses don’t borrow, the money supply fails to expand; in fact, many are trying to pay back loans, which is deflationary. Even so, contrary to popular opinion, deflation is much better than inflation....

He hasn't got the money situation straight, see?  Sounds good leading off, but the follow through is all kinds of messed up.  Money doesn't get destroyed just because prices fall or a guy doesn't pay his bills.  Even if you don't know the first thing about fractional reserve accounting, it shouldn't make sense to anybody that money is destroyed if you pay down a loan and if you default on it just the same.  That's just common sense.

He's made a common mistake, really, but just goes to show -- a lot of these folks just aren't doing their homework.  I'm sure he probably knows a lot about certain financial markets that I don't, and maybe he makes his clients a lot of money, but we're talking about the central issue to this whole mess -- money. I assume that's what you're interested in. It's what's driven most of these folks out here seeking answers in the first place.  They're worried the entire system's falling apart, not just a little piece of trivia. 

You'd think that if a guy cared enough about it, he'd know a little bit more about the central issues and wouldn't make mistakes like that.  How's he going to be any good to anybody or make any kind of intelligent decision without some basic background knowledge?  If it was just about making money...well, you'd probably be better off forgetting this whole fringe thing. You'd better be in it 'cause you're after the truth -- anything less, and you'd best just head on.  You'll never have the stayin' power.

You are interested in how the whole thing works aren't you?  In finding real answers?  Then I'd suggest not listening to people who don't seem to be investing the time to understand the basic principles of monetary accounting.  It isn't necessarily an easy thing to pick up, but it isn't too terribly difficult, either.  It takes some work, but if you're going to be sounding off on a subject, better start putting in the time.  We all have our Half-Wit moments, I suppose, but there's just too many people out there who've been at this too long not to pick up on the basics.

I'd encourage you to do the up-front work.  By learning just a few things, you'll be able to spot 95% of these folks in an instant.  The information isn't controversial -- you can easily find it in many mainstream publications without knowing a lot of background.  Learning the basic bookkeeping of the banking system and how it affects the money supply is a good first step.

Socionomics/Kondratieff/Elliot Wave Theorists

On over there is a bunch of related folks who are into comparing economic systems with waves.  The Kondratieff folks are probably the easiest to understand.  Kondratieff was a Russian economist under Lenin who observed at the time that economies tended to go through 40 to 60 year cycles of growth and stagnation.  That's pretty much it.  It's not so much a theory as there isn't much of a developed notion of cause and effect.  It's more of an observation.  Other people have taken this idea in different directions and I'm sure they'd have lots to tell you.  But the basics of it aren't real complicated.

Socionomics folks are into the idea that social forces and economic forces are intermingled, so that they influence one another in specific ways.  Which is all probably true.  But then they go on to try to make a convoluted theory of how these forces intermittently reinforce and counter eachother to produce -- surprise! -- waves.  They try to use economic indicators like the length of women's hemlines and trends in music preferences to predict stock market moves.  I think this is more like pattern recognition than an actual, well-developed theory.

The Elliot wave 'theorists' have a far more elaborate wave scheme, where waves of progressively shorter periods and smaller magnitudes are superimposed on one another to describe the moves of markets in ever increasing detail.  Kind of like doing a Fourrier transform on the Dow Jones Industrial Average, if you're familiar with that kind of thing.

These groups tend to see the economic crisis as the inevitable downturn and ebb of a passing wave.  They use words like 'Grand Supercycle' to describe the magnitude of it.  But as this point of view is somewhat passive with respect to economic cause and effect, they don't offer a lot of guidance as to what has gone wrong.  There isn't a lot of activism or advocacy coming out of them.  I haven't heard of anybody pushing to make miniskirts mandatory or for 24/7 pop music to keep markets booming.  You can listen to these folks if you like, but I don't put a lot of stock in what they say.  I've read a little; it was kind of like stuffing my head full of lint.  Mostly harmless, but probably a waste of time.  They might be useful for some kinds of investor technical analysis, maybe, but they certainly can't compare to the comprehensive theories of the Austrian school.

But maybe you can find something to 'em that I can't.

The Greenbackers and LaRouche

Now the Greenbackers over there, they're something different entirely.  They're much more of a political animal.  They're actually descended from an old nineteenth century political party that disappeared out here into the fringe a long time ago, and for the most part had been forgotten.  But since the whole crisis happened, they've been getting more attention.

The big reason they're getting the attention is their strident opposition to the FED, which has come under scrutiny of late for its role in screwing things all up, as well as the banking system the FED carries water for.  In this, they resemble Austrians like me and a few other hard-money groups.  But that's pretty much where the resemblance ends.

Thing is, the Greenbackers are the exact opposite of hard money.  They favor a completely unbacked currency and they want to give authority over it to Congress.  They want Congress to use this power to print up money for whatever it is that Congress would like to do, like fund its programs.  This is open advocacy of rampant inflation, and it would be an absolute disaster if they ever pulled something like that off.

LaRouche is similar in that it attracts people who are disenchanted with the political and economic status quo, which these days is a lot of people.  They will appeal to notions of patriotism and fairness, but when you get into their theories and initiatives, you'll find that they are advocates of a fascist system.  They want to place power over the economy in the hands of the executive branch of the federal government, plain and simple.

At least, you'll find that they're fascists if you're capable of recognizing fascism when you see it.  And that's the problem -- a lot of people can't recognize these things if it's not spelled out for 'em.  What with the crisis and all, there's an awful lot of people out here in the boonies looking for answers who aren't used to this kind of thing.  They don't know what to look for.  Things seemed to be going well enough for so long back in mainstream-land that they haven't really given these issues a lot of thought.  They've been busy, supporting families and living their lives as the decent folk that they are.

The Tea Partiers and Those Out To Get Them

Like these Tea Partiers, for example.  A few of us headed out here just a few years ago when things started going south, and it took us a bit to get our bearings.  But we were actually in it for the economics.  We already had an interest, so we had a lot af background information and a pretty reasonable idea what to look out for.

Now with the Tea Partiers, we've got a whole stampede of folks wandering around out here who've never heard of half of this.  Something like 25% of the electorate goes off the reservation, all of a sudden. They're fed up with the mainstream and looking for answers, but they're mostly political and concerned citizens, not actual economics enthusiasts.  It isn't quite so simple for them.  (Not that it was even all that simple for us, mind you.)  In the mainstream there's only one way to go and it's the wrong way.  It'll take you straight to hell, eventually, if you're patient enough.  But out here, there's a million ways to get there, and quick.

A lot of people are mad about the same things.  They see the same things wrong -- that's why they're out here.  But just because some guru's noticed what you've noticed and has the same beef as you doesn't mean his theories are right or that the answer he's got for you is any better than taking a ball-peen hammer and smacking yourself in the forehead.  In all probability he's a screwball and a crackpot.  There's a lot of 'em out here and there's always gonna be.  That's just the way it is.

You've gotta be careful the company you keep out here, and these two groups are especially bad.  I'd be careful to steer clear if I was you.

The Inflationists and Deflationists

Among us monetary types, we typically divide into two camps with respect to our idea about where things are headed, money-wise.  The camp we choose is almost, but not quite, independent of our philosophical association -- Keynesian, Austrian, etc.  The inflationists generally believe that money will become increasingly worthless as more and more is generated as governments try to get themselves out of the financial pickle they've gotten themselves into.  The deflationists think the opposite -- they see collapsing money supplies in the future as the world goes into a sort of 'credit withdrawal' period and the accumulated debts are unwound.

Now, I myself am an inflationist, but in my opinion, you can be a theoretically sound deflationist if you go into it with your eyes open to the facts of the matter and have a solid understanding of the system.  I just think the facts of the matter point clearly the other way is all.  Problem is, most of the deflationary types have their facts all wrong.  So many, in fact, that it is almost worthwhile to divide these two camps along a completely different line.

The principle dividing line between what I consider the legitimate deflationists and inflationists and the others is that the illegitimate crowd seem to think that money supplies are going to fall 'out of control.'  That is to say, they think that no matter what the governments and central banks do, they will be powerless to stop it.  This is what I would call a 'deflationist,' even though there are some in the 'inflationist' camp who think that central banks are in control of the money supply, but will nevertheless choose a policy of deflation.  I would still call such a person an inflationist because he's in basic agreement with the rest of that camp as far as how the system works, he just disagrees on the exact plans of the people in charge.  Kinda like the Supply-Side and Mainstream Keynesians.

Most of the 'deflationist' sentiment seems to me to come from a sort of chicken little 'all money is debt' syndrome.  They somehow get caught up on the fact that 'all money is debt' in the present money system, and seem to think it means all sorts of things that it really doesn't.  First of all, all money is not debt in the way they think it is.  It is a claim  against a bank is all, which is a debt in one way but not in many of the normal ways we tend to think about debt. 

When you deposit money in a bank, you get a 'deposit' in return, which is a claim against the bank to receive back what was put in.  From that point on, the deposit trades just as money does, and it is money, unless of course you go and 'withdraw it' to get paper money, at which point the bank has fulfilled its obligation and the deposit gets nixed.  Meanwhile, while the bank still has your deposit, it also lends out that deposit, creating money in two places at once -- the accounting entry 'deposit,' and the loan that was extended using your deposited money.  This 'accounting entry' aspect of money is far more important to understanding the behavior of money supplies than the fact that 'all money is debt.'

Paper money and bank reserves are claims against the FED, which is just another bank except that it has the monopolistic power of issuing its own paper money and creating bank deposits against the assets it has on its books.  And the FED can (and does!) produce money at will, simply by purchasing assets or extending loans with money that it creates.  It can destroy money by selling its assets, which lets it retrieve back the money it issued.

Now, what you see here is that money is created by the extension of loans, both by the central bank (the FED) and the banks themselves.  Which is to say, in general, that as debt levels rise, so does the money supply.  What most deflationists get wrong is that they either get correlation confused with cause and effect, or they think that since 'all money is debt,' that debt 'supplies' and money supplies must move in the same direction.  They think that if debt levels fall, so will the money supply, of necessity, and that this will be some kind of vicious cycle, because as debt is payed down, there is ever less money to pay the remaining debt. 

All of which just ain't true.  There are many ways for the two to move in opposite directions.  Just checkin' on the money and debt quantities over the last year or so would show that to be the case, but fat chance getting that through a deflationist's thick skull.  I'm quite sure that a government or central bank hell-bent on flooding the marketplace with money would have no problem at all, regardless what the debt market was doing.

A slightly more sophisticated version of that argument is that the central bank can create as much paper money and reserves as it wants, but it can't force the banking system to lend it out or borrowers to borrow it so that it will wind up in circulation.  I say that any central banker who can't do that just isn't worthy of his title.  He just isn't showing the initiative is all, or has morals or something.  More than likely, if he's playing like he can't, it's actually because he doesn't want to.

Reality is, money is far more an accounting entry than it is a debt, even though it's both in our system.  And if the last twenty years of financial history is anything, it's incontrovertible proof that with enough encouragement a creative person can do practically anything with an accounting entry, long as he's not held back by some pesky integrity or what have you.  And these creative geniuses have had a good century since the FED came along to rig the system just so.  Believe me, they know how to keep the thing 'under control.'

You don't need to worry about the deflationists of the 'out of control' variety, in my opinion.  The politicians and bankers can do anything they want with accounting -- it's the economy that's outside their control.  You know, physical reality, that kind of thing.  It's easy to fib, tough to split the atom.  I've got faith in our leadership that they'll do absolutely whatever it takes to serve their selfish interests and screw everybody else.  It's just a matter of who gets in charge and what he wants.  I'm saying inflation.

To be continued...

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