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Re: [RT] VON MISES AND AN ECONOMIC BLUEPRINT?



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You may want to read the book "Tomorrow's Gold" by 
Marc Faber.  Known as Dr. Doom for his uncanny ability to identify bubbles 
and manias (Dow 87, Nikkei, Asian Tigers, Nasdaq recent), Faber is also great at 
identifying new opportunities.  He explains all this rather well in his 
book with theories, facts, numbers and charts.  Since he is an economic 
historian, he draws upon examples that are centuries old (as well).  BTW, 
he also is an ardent student of the Austrian School and uses business cycles to 
explain Booms, Busts and Recoveries.  Try:  <A 
href="">http://www.gloomboomdoom.com to 
learn more about Faber.  Of course, the book is probably available on 
Amazon.
I have no connection with Faber, just enjoyed the 
book.  He sees a lot of opportunity in selected parts of Asia, but that is 
his priority opportunity.  He is equally facile with the rest of the 
world.
Navtej
<BLOCKQUOTE 
>
  ----- Original Message ----- 
  <DIV 
  >From: 
  Charles Meyer 
  To: <A title=realtraders@xxxxxxxxxxxxxxx 
  href="">REAL TRADERS 
  Sent: Sunday, May 04, 2003 9:27 AM
  Subject: [RT] VON MISES AND AN ECONOMIC 
  BLUEPRINT?
  
  Group-
   
  Looks like I've got way too much time on my hands 
  this Sunday morning in a note sent to a couple
  of my correspondents.  <FONT 
  face=Arial size=2>Maybe I'm coming up with my 
  own version of economic faith on this traditional day of Christian 
  worship.(:-)  <FONT face=Arial 
  size=2>All fwiw.....thank you for your time and attention.
  <FONT face=Arial 
  size=2>=====================================================================
   
  I believe everything that is written in this 
  article to my core being.  Intuitively; I know these 
economic
  concepts to be the truth; and supported by 
  history.  It seems to me 
  that the Austrian School of Economics are the only <FONT 
  face=Arial size=2>fundamental concepts and 
  explanations that I can relate to as 
  the basis of logic without flaws and <FONT face=Arial 
  size=2>supported by facts and evidence.  Still; for me 
  there exists an intellectual dicotomy here 
  regards this explanation of economic history; for even as I 
  read; and re-read the article; there are 
  gaps in my understanding of specific details 
  cited in this article.  In other words; even if I memorized this piece 
  word for word; I would be unable to fully 
  explain how this works to someone at a cocktail party.  If I could then I 
  would be fully able to explain and expand on 
  why these economic concepts are the truth about what has happened and 
  what is now happening.  It is the one good 
  economic oriented explanation I've seen as to 
  why we are in a secular bear market which is to 
  
  last for at least a few years to 
  come.  I would love to 
  see ONE book which breaks down 
this
  economic logic into <FONT face=Arial 
  size=2>easy to understand examples; using specific numbers; and which 
  addresses what appear to be some unanswered 
  explanations.  Perhaps it is a lack of understanding on my part; or 
  mental laziness and <FONT face=Arial 
  size=2>unwillingness to study this piece again and again.
   
  Even before these economic comparisions 
  between the great depression and the current economic
  period; cyclical and astro theorists have stated 
  that we can expect a period similiar to 1873 - 1886.
  In looking at a log chart of prices during that 
  time the broad intermediate price swings that occurred
  can be labeled as follows:
   
  6 5/8....5....6 1/4....4 3/4....7 7/8....5 
  7/8....7 7/8.
   
  6 5/8 is the level of prices; roughly; at the 
  beginning of 1873.  At the end of 1886 note that prices
  were roughly at the same level as the peak which 
  occurred in 1881.  Interestingly; this pattern fits
  perfectly with all the unique and historically 
  compelling studies of economic history that <FONT face=Arial 
  size=2>John Manuldin has been reporting in his 
  weekly e-mails.  Of course the pattern is not going to be 
  exact;
  because as some accurate observer stated; 
  'history does not replicate it rhymes'.  About all we know
  is that there will be both <FONT 
  face=Arial size=2>great opportunities--and great <FONT face=Arial 
  size=2>frustrations-- for traders on both 
  the long and short side of the market.  
  
   
  I can't say if all this information can be tied 
  together in a synergestic manner that 
  represents an accurate blueprint for the future; but I haven't seen any other 
  arguments out there that I'm more willing 
  to believe.  
   
   
  chas
   
   
  ----- Original Message ----- 
  From: <A 
  title=article@xxxxxxxxx href="">Mises Daily 
  Article 
  To: <A title=article@xxxxxxxxxxxxxxxxx 
  href="">Mises Daily Article 
  Sent: Friday, April 18, 2003 7:55 AM
  Subject: Does a Falling Money Stock Cause Economic 
  Depression?
  
  <A 
  href="">http://www.mises.org/fullstory.asp?control=1211
   
  Does a 
  Falling Money Stock Cause Economic Depression? 
  
  By Frank Shostak
  [Posted April1 18, 2003]
  <IMG src="" 
  align=right border=0>Despite the aggressive lowering of the federal funds rate 
  target from 6.5% in December, 2000 to the current level of 1.25%, U.S. 
  economic activity remains subdued. Faced with a lackluster response to this 
  aggressive monetary stance, it is tempting to draw parallels with the 1930's 
  economic depression. 
  Most economists hold that such comparisons are not warranted. 
  Following the writings of Milton Friedman, they are of the view that the 
  policy makers of the Fed have learned the lesson of the Great Depression and 
  know how to avoid a major economic slump.
  In his writings Milton Friedman blamed central bank policies 
  for causing the Great Depression. According to Friedman the Federal Reserve 
  failed to pump enough reserves into the banking system to prevent a collapse 
  in the money stock (Milton and Rose Friedman's Free To Choose). In 
  response to this failure, Friedman argues, money stock, M1, fell by 33% 
  between late 1930 and early 1933 (see chart).
  <IMG src="" 
  border=0>
  According to Friedman, as a result of the collapse in the 
  money stock economic activity followed suit. Thus by July 1932 year-on-year 
  industrial production fell by over 31% (see chart). Also, year-on-year the 
  consumer price index (CPI) had plunged. By October 1932 the CPI fell by 10.7% 
  (see chart).
  <IMG src="" 
  border=0> <IMG src="" 
  border=0>
  However, a close examination of the historical data shows that 
  contrary to Friedman the Fed was extremely loose and pumped reserves into the 
  system in its attempt to revive the economy (on this see Murray Rothbard's 
  America's 
  Great Depression). The extent of monetary injections is depicted by 
  changes in the Fed's holdings of U.S. government securities. Thus on January 
  1930 these holdings stood at $485 million. By December 1933 they had jumped to 
  $2,432 million—an increase of 401% (see chart). Moreover, the average yearly 
  rate of monetary injections by the Fed during this period stood at 
  98%.
  <IMG src="" 
  border=0>
  Also, short-term interest rates fell from almost 4% at the 
  beginning of 1930 to 0.9% by September 1931 (see chart). Another indication of 
  a loose monetary stance on the part of the Fed was the widening in the 
  differential between the yield on the 10-year T-Bond and the yield on the 
  90-day Bankers Acceptances. The differential rose from -0.51% in January 1930 
  to 2.37% by September 1931 (see chart).
  <IMG src="" 
  border=0> <IMG src="" 
  border=0>
  The sharp fall in the money stock between 1930 to 1933, 
  contrary to Friedman, is not indicative of the Federal Reserve's failure to 
  pump money. Instead it is indicative of a shrinking base of investable 
  capital brought about by the previous loose monetary policies of the 
  central bank. Thus the yield spread increased from -0.9% in early 1920 to 1.9% 
  by the end of 1925 (an upward sloping yield curve indicates loose monetary 
  stance). The reversal of the stance by the Fed from 1926 to 1929 burst the 
  monetary bubble (see chart).
  <IMG src="" 
  border=0>
  In addition to this, at some stages monetary injections were 
  massive. For instance, the yearly rate of growth of government securities 
  holdings by the Fed jumped from 19.7% in April 1924 to 608% by November 1924. 
  Then from 0.3% in July 1927 the yearly rate of growth accelerated to 92% by 
  November 1927. Needless to say that such massive monetary pumping amounted to 
  a massive exchange of nothing for something and to a severe depletion of the 
  pool of real funding, that is, the essential source of current and future 
  capital needed to sustain growth. 
  As long as the pool of real funding is expanding and banks are 
  eager to expand credit (credit out of "thin air") various nonproductive 
  activities continue to prosper. Whenever the extensive creation of credit out 
  of "thin air" lifts the pace of real-wealth consumption above the pace of 
  real-wealth production the flow of real savings is arrested and a decline in 
  the pool of real funding is set in motion. Consequently, the performance of 
  various activities starts to deteriorate and banks' bad loans start to rise. 
  In response to this, banks curtail their lending activities and this in turn 
  sets in motion a decline in the money stock. 
  The fall in the money stock begins to further undermine 
  various nonproductive activities, i.e. an economic depression emerges. In this 
  regard after growing by 2.7% year-on-year in January 1930 bank loans had 
  fallen by a massive 29% by March 1933 (see chart).
  <IMG src="" 
  border=0>
  How is it possible that lenders can generate credit out "of 
  thin air" which in turn can lead to the disappearance of money? Now, when 
  loaned money is fully backed up by savings, on the day of the loan's maturity 
  it is returned to the original lender. Thus, Bob—the borrower of $100—will pay 
  back on the maturity date the borrowed sum plus interest. The bank in turn 
  will pass to Joe, the lender, his $100 plus interest adjusted for bank fees. 
  To put it briefly, the money makes a full circle and goes back to the original 
  lender.
  In contrast, when credit is created out of "thin air" and 
  returned on the maturity day to the bank this amounts to a withdrawal of money 
  from the economy, i.e, to a decline in the money stock. The reason for this is 
  because there wasn't any original saver/lender, since this credit was created 
  out of "thin air." 
  It follows then that the sole cause behind the wide swings in 
  the stock of money is the existence of fractional reserve banking, which gives 
  rise to unbacked-by-savings credit. (In the <A 
  href="" 
  target=_blank>Mystery of Banking Murray Rothbard showed that it is 
  the existence of the central bank that enables fractional reserve banking to 
  thrive). 
  Observe that economic depressions are not caused by the 
  collapse in the money stock (as suggested by Milton Friedman), but come in 
  response to a shrinking pool of real funding on account of previous of loose 
  money. Consequently, even if the central bank were to be successful in 
  preventing the fall of the money stock, this would not be able to prevent a 
  depression if the pool of real funding is declining. Also, even if loose 
  monetary polices were to succeed in lifting prices and inflationary 
  expectations (as suggested by Paul Krugman), this would not revive the economy 
  as long as real funding is declining.
  Again, note that contrary to popular thinking, depressions are 
  not caused by tight monetary policies, but are rather the result of previous 
  loose monetary policies. On the contrary, a tighter monetary stance arrests 
  the depletion of the pool of real funding and thereby lays the foundations for 
  economic recovery. Furthermore, the tighter stance reveals the damage that was 
  done to the capital structure by previous monetary policies. 
  Have we learned the lesson of the Great 
  Depression?
  Do central banks have all the necessary tools to prevent a 
  severe economic slump similar to the one that occurred in the 1930's? Most 
  economists are adamant that modern central banks know how to counter the 
  menace of a severe recession. 
  But if this is the case why has the central bank of Japan 
  failed so far in reviving the Japanese economy? The Bank of Japan (BOJ) has 
  used all the known tricks as far as monetary pumping is concerned. Thus 
  interest rates were lowered to almost zero (see chart) while BOJ monetary 
  pumping as depicted by its holdings of government securities increased by 323% 
  between January 1990 and March 2003 (see chart).
  <IMG src="" 
  border=0> <IMG src="" 
  border=0>
  It is likewise in the U.S. For over two years the Fed has been 
  aggressively lowering interest rates and yet economic activity remains subdued 
  (see chart). For instance, in relation to its long-term trend industrial 
  production remains in free fall (see chart). The Fed's holdings of government 
  securities have increased by 189% between 1990 Q1 and 2002 Q4. The yearly rate 
  of growth of these holdings jumped to 14.1% in Q4 2002 from 9.8% in Q1 (see 
  chart).
  <IMG src="" 
  border=0> <IMG src="" 
  border=0>
  <IMG src="" 
  border=0> <IMG src="" 
  border=0>
  Moreover, a steep fall in the personal income to personal 
  outlays ratio indicates that the pool of real funding is under 
  pressure (see chart). Note that during the 1930's the fall in this ratio 
  wasn't as steep as now (see chart).
  <IMG src="" 
  border=0> <IMG src="" 
  border=0>
  We suspect that there is a strong likelihood that if the 
  economy does not rebound soon, the Fed will lower interest rates further and 
  will intensify its monetary pumping. This, however, will only further prolong 
  the economic misery.
  
  
  
  
  Frank Shostak is an adjunct scholar of the Mises Institute and 
  a frequent contributor to Mises.org.  Send him <A 
  href=""><FONT color=#000080 
  size=2>MAIL and see his outstanding 
  Mises.org <A 
  href="" 
  target=_top>Daily Articles 
  Archive. Special thanks to Michael Ryan for his 
  comments, thanks Peter Stellios for assisting in collection of historical 
  data.
  
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