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Tks Navtej-
This certainly looks like an illuminating
read! I'm obviously trying hard to not become an expert
in
economic truth. <FONT face=Arial
size=2>An ambitious goal such as this would involve a lifetime of reading,
studying
and
researching.
chas
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Navtej S. Nandra
(RR)
To: <A
href=""
title=realtraders@xxxxxxxxxxxxxxx>realtraders@xxxxxxxxxxxxxxx
Sent: Sunday, May 04, 2003 9:14 AM
Subject: Re: [RT] VON MISES AND AN
ECONOMIC BLUEPRINT?
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
href=""
title=realtraders@xxxxxxxxxxxxxxx>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
href="" title=article@xxxxxxxxx>Mises Daily
Article
To: <A href=""
title=article@xxxxxxxxxxxxxxxxx>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
<FONT color=#002864
size=1>
Does
a Falling Money Stock Cause Economic Depression?
By Frank Shostak
[Posted April1 18, 2003]
<IMG align=right border=0
src="">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 border=0
src="">
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 border=0
src=""> <IMG border=0
src="">
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 <A href=""
target=_blank>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 border=0
src="">
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 border=0
src=""> <IMG border=0
src="">
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 border=0
src="">
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 border=0
src="">
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 border=0
src=""> <IMG border=0
src="">
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 border=0
src=""> <IMG border=0
src="">
<IMG border=0
src=""> <IMG border=0
src="">
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 border=0
src=""> <IMG border=0
src="">
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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