Context is key.
During last week’s Friday Gold Wrap podcast, Mike Maharrey emphasized the importance of understanding sound economic theory. Without a firm grasp of basic economic principles, it becomes impossible to properly evaluate any observations you make and to properly interpret economic data. As economist Frank Shostak put it in a recent article published at the Mises Wire, “In order to really make sense of the data one must have a theory, which stands on its own feet, and did not originate from the data. By means of a theory, one could scrutinize the data and could then try to make sense out of it.”
Shostak goes on to explain the most fundamental economic concept and how we can use the framework of “human action” to better understand economic data.
We often talk about the fatal conceit and hubris of central bankers who think they can micromanage a complex economy. Oftentimes, these monetary policymakers do things with the best of intentions, believing their actions will move the economy in the right direction. Sometimes, they do things just to benefit their buddies. Regardless of their motives, these actions have consequences.
The mechanizations of the Federal Reserve under Alan Greenspan along with other players in the US government in the 1990s blew up a massive “tech bubble” that eventually popped. Fed monetary in the wake of that collapse set the stage for the 2008 financial crisis. Fed monetary policy in the wake of that crisis set the stage for today.
In the following article, Peter Schmidt offers an overview of three moves Greenapsn made in the 1990s that helped fuel the mania that blew up the dot-com bubble. This look back in time offers us some valuable lessons for today.
As Peter Schiff put it in his most recent podcast, Jerome Powell blinked.
In a surprising about-face, the Federal Reserve Chair hinted that interest rates are “just below” neutral, leading to speculation that the central bank might be close to ending its tightening cycle. Peter said the Fed has basically been playing a game of chicken with the markets.
And the way the game of chicken goes is the markets keep moving lower and the Fed keeps talking about how great the economy is and how many rate hikes are coming in the future and somebody his to flinch. Somebody has to blink. It’s like you have these two automobiles driving toward each other and there’s going to be a major crash unless somebody turns the wheel. And it seems like it was Jerome Powell that turned the wheel first and in fact was chicken.”
As we’ve noted before, Keynesian central planners suffer from fatal conceit. They think they are smart enough to plan and direct the economy better than the free market. When you boil it all down, these people believe they can do a better job of making your economic decisions than you can. After all, a free market is nothing more than the aggregate of all of our individual economic choices. Paul Krugman serves as the poster child for central planning arrogance, but another Nobel Prize-winning central planner is making a name for himself by tearing down the free market. Joseph Stiglitz claims capitalism is “rigged.” But as economist Bill Anderson shows in an article recently published on the Mises Wire, Stiglitz has got it completely wrong. Capitalism – in the true sense of the word – isn’t rigged. Socialism is.
As the stock market was tanking last month, Peter Schiff said a recession is obviously coming. Now things have calmed down a little bit and everybody seems convinced October was just a bad month — a needed correction. But as Peter has been saying, there are some fundamentals everybody is ignoring that look really bad. The housing market, in particular, is showing signs of trouble. In fact, we don’t have a booming economy; we have a bubble.
In an article published on Seeking Alpha, Mad Genious Economics provides an in-depth breakdown of an economy rolling over, focusing specifically on housing and auto markets, the trade war and banking.
Peter Schmidt recently wrote two article highlighting the fatal conceit of PhD central planners who populate the world’s central banks. You can read those articles here and here. But central banking is not the only place you find people suffering from fatal conceit and the delusional notion that they are smart enough to micromanage the economy. You find a lot of these people in government offices as well.
For instance, consider New York Gov. Andrew Cuomo. Before he moved into the governor’s mansion in Albany, Cuomo helped orchestrate the 2008 housing crash. Schmidt highlights Cuomo’s role in that horror story in the following article.
In a podcast earlier this month, Peter Schiff talked about the “twin deficits” of national debt and trade. We’ve talked a lot about the federal debt spiral, and there has even been some discussion about it in the mainstream. But almost nobody is paying attention to the growing trade deficit. Peter is an exception. When the August numbers came out earlier this month, Peter noted it was the largest trade deficit in merchandise since the summer of 2008. And what happened right after the summer of 2008? The collapse of 2008.
The reason the trade deficit got that big is before the collapse, we had a bubble. We had a consumer debt binge where all the cheap money that was being created was feeding imports because Americans were taking their incomes, or their cheap money, and buying imported products. And so the big trade deficit was evidence of the bubble. And of course, the big trade deficits in and of themselves are unstainable.”
Antonius Aquinas has also taken note of the trade deficit. In the following article, he points out that tariffs aren’t going to make America Great Again. We need savings and investment, not a trade war.
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.