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There is a great deal that is wrong with mainstream economic commentary, starting with its unwavering devotion to orthodox economics and unshakable faith in their “stimulus.” No matter how little is actually stimulated there is never any doubt that the media will simultaneously forget the last one while lavishing praise on the next one. It is, however, the actual economic commentary itself that may be the most damaging. Because nothing works, every news story is printed from the shallowest, narrowest perspective. It is a grave disservice to the public and journalism.

As an example, on July 15, 2015, the Wall Street Journal published an article on Industrial Production that wasn’t unique or atypical. If you read these kinds of stories you find them utterly devoid of differences, so this effort was entirely symptomatic. At the time, industrial production for June 2015 was estimated to have risen 0.3% month-over-month, ending a string of six consecutive M/M declines. That fact more than the degree of the rise was cheerfully reported as if meaningful.

U.S. industrial production rose in June, a sign that the improving economy is helping the sector break out of a slump.

Industrial production, a measure of output in the manufacturing, utilities and mining sectors, rose a seasonally adjusted 0.3% from May, the Federal Reserve said Wednesday.

Even though the article noted that one month was nowhere near enough to overcome those prior declines, it didn’t matter because it was finally a plus sign conforming to the mainstream “narrative.”

The pickup comes as other measures show improvement in the economy this spring, with employment continuing to climb and wages creeping up as the labor market tightens…

“Weakness in manufacturing appears to be past its peak,” wrote Jim O’Sullivan, chief U.S. economist for High Frequency Economics in a note to clients.

…click on the above link to read the rest of the article…

Mises.org: Keynes’s Critique of Econometrics is Surprisingly Good

May 6, 2016

MISES.ORG: KEYNES’S CRITIQUE OF ECONOMETRICS IS SURPRISINGLY GOOD

In a recent article we had a brief look at Ragnar Frisch’s (1895–1973) vision of econometric model building. As mentioned, Frisch was the first economist chosen over Mises to win the Nobel Prize in 1969. In fact, there was a second one in the same year. Frisch won the prize jointly with Dutchman Jan Tinbergen (1903–1994), who applied Frischian econometrics for the first time in large-scale macro models by the end of the 1930s.

In the first volume of his investigations into business cycles commissioned by the League of Nations, entitled Statistical Testing of Business Cycle Theories, published in 1939, Tinbergen exonerates the statistician and econometrician from his responsibility and explains:

The part which the statistician can play in this process of analysis must not be misunderstood. The theories which he submits to examination are handed over to him by the economist, and with the economist the responsibility for them must remain; for no statistical test can prove a theory to be correct.

While classical and Austrian economists would agree that an economic theory cannot be proven correct empirically, they would not as easily let the statistician off the hook. Indeed, the econometrician and statistician have some responsibility for the economic theories that come to be accepted, especially if one holds, as Tinbergen does, that those theories can be proven “incorrect, or at least incomplete, by showing that it does not cover a particular set of facts.”

This is an odd claim, since practically any theory is incomplete, but this does not mean that it is incorrect. Obviously there remains a twofold danger: A wrong theory might not be proven wrong, although it could be done in principle, and a true theory might be “proven wrong” mistakenly, because it is incomplete as it does not account for some particular set of facts. The econometrician would of course be responsible for these errors.

…click on the above link to read the rest of the article…

Austrians Get (Some) Mainstream Credibility

January 16, 2016

AUSTRIANS GET (SOME) MAINSTREAM CREDIBILITY

Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain’s Adam Smith Institute publishes a paper by Anthony Evans [Editor’s note: Anthony is a Founding Fellow of The Cobden Centre] that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.

The Adam Smith Institute’s paper is not so shy, and includes both “sound money” and “Austrian” in the title, though the first comment on the web version of the press release says talking about “Austrian” proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans’s paper.

The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers’ central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed’s new policy of raising interest rates was influenced by the BIS’s view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.

…click on the above link to read the rest of the article…

How the Business Cycle Happens Part 1

October 22, 2015

How the Business Cycle Happens Part 1

[This excerpt from the first chapters of Murray Rothbard’s America’s Great Depression (1963)] Reprinted from Mises.org

Study of business cycles must be based upon a satisfactory cycle theory. Gazing at sheaves of statistics without “pre-judgment” is futile. A cycle takes place in the economic world, and therefore a usable cycle theory must be integrated with general economic theory. And yet, remarkably, such integration, even attempted integration, is the exception, not the rule. Economics, in the last two decades, has fissured badly into a host of airtight compartments — each sphere hardly related to the others. Only in the theories of Schumpeter and Mises has cycle theory been integrated into general economics.1

The bulk of cycle specialists, who spurn any systematic integration as impossibly deductive and overly simplified, are thereby (wittingly or unwittingly) rejecting economics itself. For if one may forge a theory of the cycle with little or no relation to general economics, then general economics must be incorrect, failing as it does to account for such a vital economic phenomenon. For institutionalists — the pure data collectors — if not for others, this is a welcome conclusion. Even institutionalists, however, must use theory sometimes, in analysis and recommendation; in fact, they end by using a concoction of ad hoc hunches, insights, etc., plucked unsystematically from various theoretical gardens. Few, if any, economists have realized that the Mises theory of the trade cycle is not just another theory: that, in fact, it meshes closely with a general theory of the economic system.2 The Mises theory is, in fact, the economic analysis of the necessary consequences of intervention in the free market by bank credit expansion.

…click on the above link to read the rest of the article…

We’re Flirting With Another Recession

October 20, 2015

We’re Flirting With Another Recession

Meaning, it might already be here.

Back in May, we were about to go to the printer with the June issue of Boom & Bust when I put on the brakes. My team wasn’t happy to hear it since these things take time to put together. But I didn’t have a choice. I had found compelling evidence to suggest that we were not just looking at another recession, but already possibly back in one.

So, we took a close look at how we’d been flirting with recession over the first half of the year, while economists kept spouting that we had reached escape velocity. Now, after a bit of reprieve during the summer, it looks to be happening again.

We recently got the worst nonfarm payroll jobs report in months as only 142,000 jobs were created last month, with August revised almost 40,000 jobs lower. Plus, labor force participation hit a new low at 62.4%. Overall, we’ve averaged 198,000 jobs per month in 2015, compared with 260,000 jobs in 2014.

For this reason and others, I have reason to believe we’re once again falling into a recession.

What makes the jobs report so concerning is that it’s a lagging indicator – meaning, it’s following a particular trend that’s already started. It supports the possibility that recession is already here.

But let’s also review some of the indicators I looked at back in June. The U.S. Macro Surprise Index shows when indicators beat or miss expectations. Green is when we’re dancing on rooftops because everything’s better than expected. You know what red means. And you can see that 2015 has been a total miss. It’s been negative all year, with early 2015 being the worst period since early 2009.

It might be up from earlier this year, but after the last couple months, it’s dangerously close to falling again.

…click on the above link to read the rest of the article…

“Everyone’s Praying But No One’s Believing” – The ‘Fed Put’ Is Dead

September 26, 2015

“Everyone’s Praying But No One’s Believing” – The ‘Fed Put’ Is Dead

Chalk Outline

Yellen’s detailed speech initially triggered an out-sized market reaction. Unfortunately, it was mainly due to shallow market depth and weak-hand positions. The ‘risk-on’ trades that ensued seem driven by positional unwinds from short-term traders. These markets will likely reverse back to lower prices once those initial trades are digested.

Yellen’s speech should quickly begin to hurt over-priced financial assets. The stellar performance of financial prices over the past several years has primarily been driven by central bank accommodation. The double digit average returns (15%+) of the S&P 500 from 2009-2014 was not driven by economic strength, but rather by massive global central bank actions. There is simply a poor correlation between economic activity and the S&P 500 in any given year.

Since the Fed’s balance sheet flat-lined in 2014 (with the policy rate locked at 0%) risk assets have chopped side-ways-to-lower. Therefore, a sooner (than priced-in) removal of accommodation should be hurting, not helping, risk assets.

The looming 2015 rate hike, threatened by Yellen and other FOMC members, is desirable and plausible in their eyes due to several factors:

1) confidence that the US economy is on firmer footing and has moved materially away from crisis conditions;

2) a sense of desire and urgency to move off the ‘zero lower bound’;

3) anxiety about not having any ammunition during the next economic downturn;

4) fear of missing the business cycle and with it the opportunity to move off of zero rates, and;

5) as stated in Yellen’s speech, the potential that holding rates too low for too long “could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability”.

Yellen’s speech was the first time I can ever remember a Federal Reserve Chairperson commenting that inappropriate risk-taking might be undermining financial stability. This is explicit confirmation that the Fed’s aim of lifting asset prices in the hopes they bolster broader economic activity has reached the end of its useful life. Barring a financial or economic disaster, the ‘Fed put’ has been put out to pasture.

…click on the above link to read the rest of the article…

Why The Recurring Economic Crises?

August 28, 2015

Why The Recurring Economic Crises?

Authored by Murray Rothbard via The Mises Institute,

A selection from Chapter 42 of Economic Controversies.

Why, then, does the business cycle recur? Why does the next boom-and-bust cycle always begin? To answer that, we have to understand the motivations of the banks and the government. The commercial banks live and profit by expanding credit and by creating a new money supply; so they are naturally inclined to do so, “to monetize credit,” if they can. The government also wishes to inflate, both to expand its own revenue (either by printing money or so that the banking system can finance government deficits) and to subsidize favored economic and political groups through a boom and cheap credit. So we know why the initial boom began. The government and the banks had to retreat when disaster threatened and the crisis point had arrived. But as gold flows into the country, the condition of the banks becomes sounder. And when the banks have pretty well recovered, they are then in the confident position to resume their natural tendency of inflating the supply of money and credit. And so the next boom proceeds on its way, sowing the seeds for the next inevitable bust.

Thus, the Ricardian theory also explained the continuing recurrence of the business cycle. But two things it did not explain.

First, and most important, it did not explain the massive cluster of error that businessmen are suddenly seen to have made when the crisis hits and bust follows boom. For businessmen are trained to be successful forecasters, and it is not like them to make a sudden cluster of grave error that forces them to experience widespread and severe losses.

Second, another important feature of every business cycle has been the fact that both booms and busts have been much more severe in the “capital goods industries” (the industries making machines, equipment, plant or industrial raw materials) than in consumer goods industries.And the Ricardian theory had no way of explaining this feature of the cycle.

…click on the above link to read the rest of the article…

Cyclical Changes in Business Conditions

June 20, 2015

Cyclical Changes in Business Conditions

The Role of Interest Rates

In our economic system, times of good business commonly alternate more or less regularly with times of bad business. Decline follows economic upswing, upswing follows decline, and so on. The attention of economic theory has quite understandably been greatly stimulated by this problem of cyclical changes in business conditions. In the beginning, several hypotheses were set forth, which could not stand up under critical examination. However, a theory of cyclical fluctuations was finally developed which fulfilled the demands legitimately expected from a scientific solution to the problem. This is the circulation-credit theory, usually called the monetary theory of the trade cycle. This theory is generally recognized by science. All cyclical policy measures, which are taken seriously, proceed from the reasoning which lies at the root of this theory.

According to the circulation-credit theory (monetary theory of the trade cycle), cyclical changes in business conditions stem from attempts to reduce artificially the interest rates on loans through measures of banking policy — expansion of bank credit by the issue or creation of additional fiduciary media (that is, banknotes and/or checking deposits not covered 100 percent by gold). On a market, which is not disturbed by the interference of such an “inflationist” banking policy, interest rates develop at which the means are available to carry out all the plans and enterprises that are initiated. Such unhampered market interest rates are known as “natural” or “static” interest rates. If these interest rates were adhered to, then economic development would proceed without interruption — except for the influence of natural cataclysms or political acts such as war, revolution, and the like. The fact that economic development follows a wavy pattern must be attributed to the intervention of the banks through their interest rate policy.

…click on the above link to read the rest of the article…

Why Keynesian voodoo doesn’t work?

June 13, 2015

Why Keynesian voodoo doesn’t work?

Keynesian policy of manipulating economic “aggregates” through countercyclical macro-measures appeared to work when balance sheets was not stretched to the brink. As we wrote in “Goebbelnomics”

“If collective exuberance and apathy is the sole cause of the business cycle, then it logically follows that human emotions need to be manipulated accordingly. Only by doing so can policymakers smooth out the ups and downs in economic activity. And what better way to do that then to change the money supplied to the general public.”

While people called this the “most sickening article ever written” it is unfortunately what economics has come down to. Through fractional reserve banking and a central bank freed from the shackles of a barbarous relic, the money supply can be expanded without limit…or at least as long as the greater populace voluntarily will leverage up their balance sheet to buy stuff and simultaneously agree to their own servitude. Nothing more than collective manipulation on a scale that would make Goebbels himself envious.

The glaringly obvious result of such policies, gross capital consumption through malinvestments epitomized through a serial bubble economy, did not discourage our money masters. The best and brightest even suggest bubbles are the only remedy to what they believe is some sort of secular stagnation.

Just as drugs, the abuser must increase the dosage to feel the same high and spend accordingly.

However, as the first chart shows, the current recovery, albeit one of the longest on record, has also been the weakest.

…click on the above link to read the rest of the article…

How Could the Fed Protect Us from Economic Waves?

June 11, 2015

How Could the Fed Protect Us from Economic Waves?

Making Waves

Mainstream economists tell us that the Federal Reserve protects us from economic waves, indeed from the business cycle itself. In their view, people naturally tend to go overboard and cause wild swings in both directions. Thus, we need an economic central planner to alternatively stimulate us and then take away the punch bowl.

Fed_Reserve Newspapers report on the adoption of the Federal Reserve Act. It was erroneously held that it was going to be “a constructive Act to aid business”. Ominously, even more such acts were promised.

Prior to the global financial crisis of 2008, a popular term described the supposed benefits created by the Fed. The Great Moderation referred to the reduced volatility of the business cycle. For example, I have written beforeabout economist Marvin Goodfriend, who asserted that the Fed does better than the gold standard.

toon (Credit: Greg Ziegerson and Keith Weiner)

An Orwellian Mandate for the Provision of Miracles

This belief is inherent in the Fed’s very mandate from Congress. The Fed states its three statutory objectives as, “maximum employment, stable prices, and moderate long-term interest rates.” These terms are Orwellian.

Maximum employment means five percent of able-bodied adults can’t find work. Stable prices are actually rising relentlessly, at two percent per year. The meaning of moderate long-term interest rates must be changing, because rates have been falling for a third of a century.

That aside, the basic idea is that the Fed has both the power and the knowledge to somehow deliver an economic miracle. However, we know that central planning never works, even for simple things such as wheat production. Communist states have invariably failed to produce the food to keep their people alive. Stalin, Mao, and other communist dictators have deliberately starved off segments of their populations that they couldn’t feed.

…click on the above link to read the rest of the article…

As Goes The Credit Market, So Goes The World

June 6, 2015

As Goes The Credit Market, So Goes The World

When confidence cracks, we’ll see it there first

During the prior economic cycle of 2003-2007, one question I asked again and again was: Is the US running on a business cycle or a credit cycle?

That question was prompted by a series of data I have tracked for decades; data that tells a very important story about the character of the US economy. Specifically, that data series is the relationship of total US Credit Market Debt relative to US GDP.

Let’s put this in simple English. What is total US Credit Market Debt? It’s an approximation for total debt in the US economy at any point in time. It’s the sum total of US Government debt, corporate debt, household debt, state and local municipal debt, financial sector and non-corporate business debt outstanding. It’s a good representation of the dollar amount of leverage in the economy.

GDP is simply the sum total of the goods and services we produce as a nation.

So the relationship I like to look at is how financial leverage in the economy changes over time relative to the growth of the actual economy itself. Doing so reveals an important long-term trend. From the official inception of this series in the early 1950’s until the early 1980’s, growth in this representation of systemic leverage in the US grew at a moderate pace point to point. But things blasted off in the early 1980’s as the baby boom generation came of age. I find two important demographic developments help explain this change.

First, there’s an old saying on Wall Street: People don’t repeat the mistakes of their parents. Instead, they repeat the mistakes of their grandparents. From the early 1950’s through the early 1980’s, the generation that lived through the Great Depression was largely alive and well, and able to “tell” their stories.

…click on the above link to read the rest of the article…

The Great Immoderation: How The Fed Is Sowing The Next Recession

March 12, 2015

The Great Immoderation: How The Fed Is Sowing The Next Recession

In February 2004 Ben Bernanke famously declared the business cycle had been tamed and took a bow in behalf of enlightened monetary management, claiming it was the principal source of this beneficent development. Exactly 55 months later, of course, he terrorized the Congressional leadership and a clueless President with the frieghtening proposition that a Great Depression 2.0 was just around the corner.

As to why he had been so stupendously wrong, Bernanke did not say. Nor did he explain why the brilliantly “stable” US economy had suddenly stumbled to the edge of an abyss despite the Fed’s energetic money printing in the interim. And the Fed had not been stingy in the slightest; it balance sheet had actually expanded by $150 billion or nearly 4.5% annually between February 2004 and the Lehman bankruptcy.

Indeed, six and one-half years on from the financial crisis—-events that made a mockery of the Great Moderation—–the monetary politburo and its acolytes on Wall Street have offered no coherent explanation as to why Armageddon loomed nigh and why the worst business cycle plunge since the 1930s actually materialized. Certainly their lame Monday morning claim that “prudential regulation” had failed doesn’t cut it.

…click on the above link to read the rest of the article…

Grant Williams: The Consequences Of Economic Peace | Zero Hedge

November 26, 2014

Grant Williams: The Consequences Of Economic Peace | Zero Hedge.

The following chart-heavy presentation from Grant Williams is among his best as he wends his way methodically from the 19th century to the present day (and into the future) examining “The Consequences of the Economic Peace.” From Keynes to Kondratieff and from Napoleon to Nixon, Williams looks at the ramifications of several decades of easy credit and attempts to draw parallels with a time in history when the world looked remarkably similar to how it does now (as he notes “that last time didn’t end so well, I’m afraid.”) The real day of reckoning (Williams notes rather ominously), when the unconscionable level of debt that has been built up during the fiat money era finally topples over under its own weight like the giant wave in The Perfect Storm, lies ahead of us.

Full Presentation:

…click on the above link to read the rest of the article…

The IMF and Austrian Theory – Ludwig von Mises Institute Canada

October 18, 2014

The IMF and Austrian Theory – Ludwig von Mises Institute Canada.

Back in the early 1960s, financial journalist Henry Hazlitt warned against efforts to create an international system to help facilitate the smooth transfer of currencies. Representatives from the world’s leading governments were attempting to increase liquidity in global markets. They wanted to make sure the banking system and sovereign governments would never had a lack of funds. Hazlitt was not fooled. “In plain English” he wrote, “they are pushing for more world inflation.” His words, though accurate, went unheeded. The International Monetary Fund, which was established decades earlier, was to play a role in facilitating endless inflation.

Half a century later, the IMF has overseen a tumultuous business cycle that came to a screeching halt in 2008. Big, overleveraged banks were on the verge of collapsing; millions of people lost their jobs and their homes; governments spent billions of dollars to maintain their welfare safety nets. The end result, which is still ongoing, is stagnant economic growth with dim prospects for recovery.

…click on the above link for the rest of the article…

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