Keynesian central planners suffer from what Peter Schmidt calls “fatal conceit.” Paul Krugman serves as the poster child for central planning arrogance. But it’s the Federal Reserve that gives the central planners power, as Schmidt highlighted in the first article in a series highlighting this fatal conceit. Schmidt built on this theme in the second article, telling the story of Benjamin Strong and his role in blowing up the 1920s stock market. In this third installment of the series, Schmidt tackles the question no one dares to ask.
Most of the mainstream view the gold standard as an archaic relic from a bygone era. At best, a return to some kind of gold standard is unnecessary. At worst, it would plunge the world into economic chaos.
Conventional wisdom holds that a gold standard would make boom-bust cycles worse. (This is a myth.) Paul Krugman even tried to claim the gold standard prolonged the Great Depression. (Economist Bob Murphy shreds this fallacy in his It’s Your Dime interview with Mike Maharrey.) But the real reason central bankers and politicians hate the idea of a gold standard is that it takes power out of their hands.
We mostly focus on the economics of a gold standard, but as Antonius Aquinas explains, there is an even more fundamental reason we need a gold standard. It’s a matter of liberty. As he puts it, “It has been the advent of central banking and with it the elimination of the gold standard which has provided the means for the state to become such an omnipresent force in everyday life.”
In an article we published last week, Peter Schmidt highlighted what he called the “fatal conceit” of modern Keynesian economics. These economists, central bankers and politicians think they can plan, direct and guide the economy through their great wisdom and application of their economic models. But as economist Friedrich Hayek explained, the central planners’ arrogance ignores the knowledge problem. No individuals or groups of individuals, no matter how many PhDs they have among them, possesses the knowledge necessary to foresee all of the consequences of a given policy.
As financial guru Jim Grant once put it, “We are the prisoners of the very dubious set of pseudo-scientific pretentions that are part of the people who manage our monetary affairs.”
In a follow up to his last article, Schmidt puts an exclamation point on this idea of fatal conceit, recounting the maneuverings of Benjamin Strong, New York Federal Reserve governor from 1914-1928.
A recent Paul Krugman New York Times column praised the success of the Keynesian macro model in the wake of the 2008 financial crisis. In his view, the Federal Reserve did exactly what was necessary – pushed interest rates to zero and launched rounds of quantitative easing to jumpstart demand. As Tom Woods and Bob Murphy put it in a recent episode of the Contra Krugman podcast, “we agree that Krugman’s model did great…if we overlook all the times it blew up in his face.”
As is typical of Keynesians, Krugman ignores the side-effects of Federal Reserve policy. It works for a while, but it perpetuates the boom-bust business cycle. Sure, the economy today seems to be booming, but there is a rotten underbelly that most everybody in the mainstream seems to be ignoring. Peter Schmidt offers a succinct breakdown of Keynesian-based Fed policy and reveals why its doomed to failure.
We are well into the third quarter of 2018. In our perpetual fast-forward world, analysts are already looking toward Q4. What will the last quarter of the year bring?
It’s virtually impossible to predict the short-term. Who knows what kind of political event, natural disaster or emerging trend will drive the markets over the next few months?
Of course, we can’t predict the future at all. We’re not fortune tellers or Old Testament prophets, but as Dan Kurz notes in his latest post at DK Analytics, it is a bit easier to project what will happen to the economy in the long run because we can clearly see the big-picture dynamics and fundamentals underlying it. As he put it, he’s less sure where America is headed in Q4 than ‘down the road’ in general. The whole thing (political, financial, economic) could fall apart at any time.”
We have declared 2017 as the “Year of the Bubbles.” We’ve reported on the stock market bubble. We’ve reported on the student loan bubble. We’ve reported on the auto bubble. We even told you about a shoe bubble. And then there is the mother of all bubbles – the debt bubble. All of these bubbles are still floating around out there. Of course, at some point, one or more of them will pop.
All of this is the result of federal reserve monetary policy. Easy money blows up bubbles. Bubbles pop and set off a crisis. Rinse. Wash. Repeat.
Some people claim gold isn’t “sound” money any more than dollars or euros. They argue that the gold supply can be inflated just like a fiat currency. After all, gold is constantly being pulled out of the ground, right? They say a gold standard actually makes the boom-bust cycle worse. But commentators who make this claim miss a number of important points.
The following article was written by Peter Schmidt. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.
When Nixon closed the gold window in August 1971, the US found itself in exactly the same economic circumstances as Britain had in September 1931 when she reneged on her gold standard obligations. If Ben Bernanke’s theory on the Great Depression is correct – namely, that ‘countries that left gold earlier also recovered earlier’ – the United States should have received an enormous economic shot in the arm after finally freeing itself from its formerly golden fetters.
So what has all the resulting money creation and credit expansion from the Fed’s PhD economists with total freedom of action wrought since 1971? A cursory review of the automobile industry, which is not an unreasonable proxy for the entire US economy, reveals that the economy did not receive a shot in the arm by freeing central bankers from their “golden fetters”– unless of course the shot was loaded with some sort of highly-toxic economic poison.
Dan Kurz runs the DK Analytics website where he posts detailed breakdowns of complex economic issues. We recently interviewed Dan as part of our It’s Your Dime Series. In his most recent post, Dan used his analytical skills to break down the first 18 months of the Trump administration.
Dan finds a little good, a little bad and even some ugly in the first year-and-a-half of Trump’s term. Dan likes the fact that the president has called out fake news, the fact that he seems to be pushing back against the establishment/deep state and his Supreme Court picks. On the other hand, Kurz believes the growing trade war could be bad news for the US economy and sees some troubling Hooverism developing.
A 1980s era Far Side cartoon featured a veterinary student named Doreen studying equine medicine in Chapter 9 of her textbook. On the left-hand side of the page was a list of horse ailments. They included things like a broken leg, infected eye, runny nose, and a fever to name just a few. On the right-hand side of the page, the treatment for each ailment was “Shoot.” The caption read, “Like most veterinarian students, Doreen breezed through Chapter 9.”
Ben Bernanke, Milton Friedman and the Ivy League economics departments that all regurgitate the same theory on the Great Depression pretty much treat the economy as simple-mindedly as Doreen’s textbook treated equine medicine.