JasonC SBB

NOTE:I have split this content off from This Thread to reduce clutter.

-Perez


No, the AUSTRIAN SCHOOL ECONOMISTS are right about every credit-fuelled bubble.

JimAtFSU

That's immaterial. I agree with you and consider myself a fan of the Austrian School but it's just a statement of preference. It tells you nothing about when a bubble will burst.

Plenty of people bet against this bubble and lost money because they shorted too soon.

brgracer

iTrader: (14)

Hindsight is always 20/20, BUT also depends on the timeframe you are looking at. It has been not even 6 months since this thread was started, and certainly the market is lower, but playing your game, anyone could have easily posted a month later from the original thread date and said the dow is up >1000 points since so who is right now.

I am neither disagreeing, nor agreeing with your standpoint about the market. It is not the bearish/alarmist tone that you take that I disagree with either. BUT the manner in which you present you views that I disagree with.

First of all, there is NO ONE (Australian School/Buffett/etc...,) who is always right as you claim. A prediction is just that, a prediction. But since the market will go up or down, certainly someone will be right. Often, some person takes a gamble, and sticks their neck out with a pretty bold call in either direction, and when they are right, they are lauded, and when they are wrong, they are ridiculed. The people who laughed at oil bulls when it was back in the 80 dollar range, certainly weren't laughing when it almost hit 150, and the oil bulls that were laughing when oil was at it's peak, certainly weren't laughing as it dropped like a rock.

My whole point is not about what direction the market is headed, BUT it about investing in general. Without answering the three fundamental questions (assuming that you are not daytrading):

#1) What is the goal for this money? Retirement? New house? Trying to hit a home run? Kid's college fund?
#2) What is your time horizon? One month? One year? Thirty years?
#3) What is your risk tolerance?

Without answering these three questions first, making ANY recommendation is foolish.

Case in point, a friend asked what he should do with a large amount of cash he was saving up to buy a home (within next 6-12 months) as he was thinking that the stock market was looking attractive since it had dropped so much. With a time horizon < 6-12 months, a low risk tolerance due to needing this money to move, and the goal of a new home, even IF we were at the market bottom, buying stocks didn't make sense for the situation due to general volatility.

As for me, I'm investing for my retirement which is 20-30 years off and I have a pretty high risk tolerance, so while stocks may certainly have dropped from 8400 since the start of the thread to now under 6800, I know that stock have both a history of being very volatile as well as the best performing investment over that same time horizon. Furthermore, as I have been regularly putting money into the market, it is akin to long term dollar cost averaging.

Again, let's compare to the Great Depression. Assuming that you bought into the broad market (something like the Wilshire 5000) on 1/1/1928 (before the "crash") and had your market value more than halved (>50% drop) at it's worst, two years after the crash, you would have been up over 10% and in twenty years you would be up over 250%. Let say you were really smart and bought the same broad basket of stocks at the end of 1932 when things were looking the worst, in 5 years you would have been up 86%, at ten years up 120%, and at 20 years up 926%. Not at under 6 months, you can post all you want, but certainly, I'm not going to dig this thread up from the dead if in a couple years, we realize this was the bottom, and to further underscore my point, even if it's not the bottom (as I said in my first example buying BEFORE the crash), you would have still come out ahead investing on the way down with a longer time horizon. Yes, I'm sure if you timed everything perfectly or was invested in only the highest returning investments during that same time period, you'd come out farther ahead, but I don't know anyone that smart.

Again, putting things in perspective here. We are < 6 months out so a bit early to claim that you were right, and if you are investing for such short time periods, then I'd call you more of a trader than an investor, and if that's the case, again, please keep your day trading stuff for the finance boards where we can go looking for them when we like.

JasonC SBB

Jim, it's not immaterial when our policy makers listen to a school of economics that believes in debt, government deficits, inflation, and creates boom-bust cycles.

JasonC SBB

brgracer,

Austrian economics teaches that there will ALWAYS be a crash after EVERY credit-fuelled bubble.

Credit fuelled bubbles today are created by central banks' manipulation of interest rates down, combined with high leverage fractional reserve ratios, also encouraged by the central bank (by implicit bailouts of bank failures due to overleverage). IOW "modern central banking" is to blame for the boom-bust cycle. Before central banks, fractional reserve banking created credit expansion created bubbles. Every time.

Austrian economics does NOT teach WHERE within the economy the bubble will inflate, nor WHEN the bubble will burst.

No surprise that the Federal Reserve Act was favored by the largest Wall St. banks of 1910. In fact their reps wrote the Act itself, in Jekyll Island. The USA BTW was one of the last countries to adopt central banking. They were kept out by a populace that believed the warnings of the Founding Fathers. (and by Andrew Jackson).

JimAtFSU

I'm a firm believer in the efficient capital markets theory.

The way to make money investing is to have information that the market does not. If you don't have this, you're essentially gambling on coin tosses. I'm not necessarily talking about insider trading. There is plenty of research that can be done by non-insiders but financially useful amounts of information must be very solid and it must be discovered very early. You have to know your particular area of investment very well to be able to make informed decisions.

Of course there is no substitute for insider trading. If you can find anything that accomplishes the same thing as insider trading without being illegal, go for it. For example, knowing a real estate agent (say a friend or relative) who will call you up if someone puts a house up on the market for below market value. There are all sorts of markets where SEC rules don't apply, use your imagination. The basic idea is that you get a zero cost option to buy something for less than it is worth before it hits the open market. Of course they get that option too, but no one has infinite money with which to buy stuff.

Anyway, it's all about information. If you have information most other people don't, you can basically take their money.

JasonC SBB

Fine. Now, are you a FED apologist? Do you believe the FED should have central planning powers? Do you agree they should be buying up failing investment banks using money created out of nothing, money whose interest payments will come from our income tax? Do you think the FED has information that allows them to make decisions for the market, that aren't better made by each tom dick and harry that has his own money on the line?

JimAtFSU

Whaaaaat?What the **** does the efficient market hypothesis have to do with monetary policy or the fed?

All it means is that information is priced into the market as soon as it becomes available. It also means that there's no magic formula to predict how the prices of stocks or how the market will move because if there was such a formula, its results would already be priced into the market. This predicts bad things about the guys that try to guess about what good stocks to buy- ECHM predicts they are full of ****. Which is why most of these guys are hit and miss- they are generally no better than index funds.

The other thing that ECMH predicts is that if the stimulus/bailout/porkulus bills would produce benefits in 10 years that benefit would be priced into stocks today rather than investors waiting 10 years to buy the stocks that will benefit from the porkulus. But the result is that all the stocks are dropping like rocks, a sign that investors only see fail ahead.

And in answer to your questions which I see as insane, no, obviously I don't think the fed or any other central planner has the ability to process the requisite amount of information, nor do I feel that such information is ever going to be available. Central planning just doesn't work. This is obvious **** that was proven many times over the past century.

ECMH isn't a pro-central-planning theory, it's just a theory about information and price.

JimAtFSU

Holy ****, there's even a wikipedia article:

By the way, taking an ECMH view of the stimulus leads one to agree with you that the jokers in washington are ******* up because that ******* up has been priced into stocks.

JasonC SBB

My point is that the FED meddles and that goes against what's good about the market, such as the EMH describes.

And there's more manipulation going on than the FED:
Web of Debt - THE NOT-SO-INVISIBLE HAND: HOW THE PLUNGE PROTECTION TEAM KILLED THE FREE MARKET

Now, why is it that most market gurus "did not see" the crash of 2008? Because they do not understand that the FED is a scam, and do not understand the Austrian theory of the boom-bust cycle. Gary North does, and that's why his forecasts are better than most market gurus.

BTW, you wrote:
You are ignoring the fact that the reason the gov't and the public spend more money than they have, is that DEBT is encouraged by the system - e.g. the FED's artificially low interest rates, coupled with fractional reserve banking, and that lending interest rates are lower than the real inflation rate. We will have NO END of booms and busts until we get on a sound currency system, and one with no legal tender laws.

JimAtFSU

I agree that it's bad but printing money/issuing treasury bonds is just the mechanism which allows us to spend beyond our means. The underlying evil is still the spending.

Back in the days when we were on the gold standard we still managed to overspend occasionally. It resulted in different types of debt instruments, but they were still debts that eventually had to be repaid. There were plenty of European countries that collapsed under staggering war debts during the founding period. The gold standard isn't a surefire protection against fiscal irresponsibility because it can't stop other countries from lending us money.

JimAtFSU

I realize the harm that the fed caused this time around and I'm not defending it.

But the truth is that we are stuck with this spend and print money reality until the american people start to demand a responsible government that lives within its means. And that isn't going to happen until the rest of the world stops extending us more credit. Once that collapses, the American people will wake up in a hurry.

But I don't mean wake up necessarily in a good way. I am afraid of what the political scene will look like during that collapse. I think there would be a big clamoring to receive the small remaining section of the pie that is paid for with tax revenue instead of public debt. We might end up with more taxes and even more economic collapse as congress takes the easy way out of tightening budgets.

JasonC SBB

Consider that the Iraq war may not have been possible without the FED's printing presses. Bushie would have had to raise taxes... A 100% gold backed currency is a huge check on spending. This is one of the main reasons why governments and bankers wanted to move away from gold backing.

It was true too of the Bank of England since the late 1600's. The King could just borrow from the BoE which simply printed fractional reserve money to fund unpopular wars ...

JimAtFSU

Ok, so please propose a way for us to move to a gold backed currency. Keep in mind the amount of debt we already have outstanding.

Rafa

iTrader: (22)

Since we're talking about debt:

JasonC SBB

It doesn't have to be gold, nor asset backed.

I believe that the following are what are needed to allow a sound currency:

1) non-inflatable by the issuing authority with discretionary powers
2) not debt-based if fiat - i.e. when new money is created there is no debt attached and thus no automatic means of currency destruction which leads to monetary contraction
3) no FRB (fractional reserve banking) on demand deposits
4) no legal tender laws (i.e. individuals reserve the right to reject the official government currency)
5) no taxes and fees on the use of and exchange of other currencies, including gold and silver
6) no interest rate manipulation by central banks
7) no bailouts of insolvent banks

#1 above will prevent manipulation and inflation
#2, #3, and #6 will prevent rapid monetary expansion and contraction which creates an unstable system with bubbles and busts
#4 is a powerful check on the official currency, so people can effectively do a vote of "no confidence", and allows people to use a different currency if the official currency is being manipulated
#4 and #5 allows currencies to compete
#6 prevents artificially low interest rates from allowing bubbles to form
#7 prevents the "moral hazard" wherein banks are encouraged to overleverage (creating bubbles), and wherein taxpayers are on the hook for such risky behavior.

Note that debt-free fiat currency issuance by the Treasury at a fixed 3 or 4% per year would fit #1 and #2 above. The gov't can then spend this money into the economy. This money will not have debt attached and would stay in the money supply permanently. In contrast, today, all new money is a debt that needs to be repaid, and when it's repaid, disappears from the money supply.

Re: asset backed currency, note that gold and silver arose out of the marketplace (due to their favorable-as-money charateristics) before governments got in on the action (i.e. monopolize minting it, clipping the coins effectively inflating the money supply)

A gold "standard" or gold/silver "standard" implies that gov't sets it and demonetizes other currencies. This violates the principles 4 and 5 above. The ills of the "gold standards" of yore were that they got manipulated and banks were allowed to do FRB on demand deposits, also creating booms and busts. However, the gold backing DID somewhat place a check on monetary expansion, limiting the size and severity of booms and busts. After the FED was created in 1913, which cartelized the banks and encouraged massive leverage and the resulting money supply expansion, the mother of all booms and busts happened - the roaring 20s and the Great Depression.

Here's a short book outlining a lot of this theory:
What Has Government Done to Our Money? by Murray N. Rothbard


Going back to "how"? Congress created the FED, Congress can abolish the FED. But long before that happens, awareness must spread.
Jim Rogers thinks that the FED will be abolished within the next 5 years.

Trent

iTrader: (11)

I have a Business Administration bachelors degree with an Economics focus. According to the dean of the economics program, all that means is that I am "officially" wrong about everything now.

JasonC SBB

How Academic Guilds Police Higher Education by Gary North

Miatamaniac92

Austrian Economic Theory is fringe and unpopular for a reason. I'm not a fan of MOST of the bailouts and think a more moderate approach is called for. We do need a government that will live within it's needs (at all levels).

Also, good luck swaying voters that inflation is bad. Most voters have debt and inflation helps debtors. Your call for MASSIVE economic change is extreme. I (and most Americans) can deal with shifts in the stock market, we can't (nor want to) deal with an Economic Revolution. The Status Quo might suck, but it's still pretty damn good.

Revolution is NOT a good thing. I just don't see any other way that what you are calling for would happen.

Here's the Wiki link to Austrian Economic Theory for further reading for everyone else. But I'll post up the direct criticisms from there:
"The main criticism of modern Austrian economics is that it lacks scientific precision. Austrian theories are not formulated in formal mathematical form, but using verbal logic. Mainstream economists believe that this makes Austrian theories too imprecisely defined to be clearly used to explain or predict real world events. Economist Bryan Caplan noted that, "what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics."[3] This criticism of the Austrian school is related to its rejection of the use of the scientific method and empirical testing in social sciences in favor of self-evident axioms and logical reasoning.[51][52]

Another general criticism of the School is that although it claims to highlight shortcomings in traditional methodology, it fails to provide viable alternatives for making positive contributions to economic theory.[53] This criticism is generally accepted, in the sense that the theories of Austrian economics are qualitative in nature and do not yield testable predictions. As an example, some[who?] Austrians propose that the net possibility of gain is a more accurate measure of the cost of an action than opportunity cost (subjectivism). However, it is ultimately difficult to measure the possibilities and risk involved.

In his critique of Austrian economics, Caplan stated that Austrian economists have often misunderstood modern economics, causing them to overstate their differences with it. He argued that several of the most important Austrian claims are false or overstated. For example, Austrian economists object to the use of cardinal utility in microeconomic theory; however, microeconomic theorists go to great pains to show that their results hold for all monotonic transformations of utility, and so are true for purely ordinal preferences.[3] He has also criticized the school for rejecting on principle the use of mathematics or econometrics. In response, Austrians argue that neoclassical economists are innumerate and do not understand the mathematics they rely on.[54] Austrians also claim that econometrics is fundamentally based on mathematically and logically invalid summation and averaging of demonstrably non-additive personal utility functions, and therefore is subjective.[55]

There are also criticisms of specific Austrian theories. For example, Nobel laureate and neo-Keynesian economist Paul Krugman argued that Austrian business cycle theory implies that consumption would increase during downturns, and cannot explain the empirical observation that spending in all sectors of the economy fall during a recession.[56] Austrian theorists argue a recession can result from a monetary contraction or a "credit crunch" that causes the investment boom not to shift but simply to disappear.[57] Nobel laureate Milton Friedman, after examining the history of business cycles in the US, concluded that "The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false."[58][59]

Economist Jeffrey Sachs asserts that when comparing developed free-market economies, those that have high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He asserts that poverty rates are lower, median income is higher, the budget has larger surpluses, and the trade balance is stronger (although unemployment tends to be higher). He concludes that von Hayek was wrong when he said that high taxation would be a threat to freedom; but rather, a generous social-welfare state leads to fairness, economic equality, international competitiveness, and strong vibrant democracies.[60] In response to Sachs' article, William Easterly noted that Hayek, writing in 1944, correctly recognized the dangers of large-scale state economic planning. He also questions the validity of comparing poverty levels in the Nordic countries and the United States, when the former have been moving away from social planning toward a more market-based economy, and the latter has historically taken in impoverished immigrants. Easterly also argues that laissez-faire countries were the leaders of "the ongoing global industrial revolution" which is responsible for abolishing much of the world's poverty.[61]"

Chris

shuiend

iTrader: (24)

Miatamaniac92
Here is a link to the actual paper that Caplan's qoutes came out of. It is a very interesting read and he does make some decent points.

Now here is a link to a post on Mises.org that has several responses to Caplan's paper and a few other repsonses to Austrian critiques.