Economics and the absurd

Mish Shedlock is the only applied economist or market analyst I listen too. I wish I'd found his blog years ago when he was predicting this recession. Mish is always fact-based and level-headed, he seems to be extremely careful to differentiate between what he knows is probable and what he doesn't know. No crazy predictions, just a few very good ones, based on both fundamentals and technicals. He works 14 hours every day.

He is an analyst at Sitka Pacific, with two hedge funds which make money even today:



Mish may be at his best when concisely showing that the Keynesians and Monetarists -- Krugman, Paulson, Bernanke, Greenspan, Friedman, etc., etc. -- are flat out fools, that 8th graders could know better just by using common sense. Mish is a fan of the Austrian school. He likes to quote von Mises:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

Here's the best place to start with Mish. If one spends an hour reading this and following some of the links to his other posts, it can be very educational.

Those with [Fiscal Insanity Virus] are trapped in academic wonderland with no ability to see anything from a real world logical perspective. Instead they rely on formulas that imply free lunch theories and/or perpetual motion.

Mish's predictions now are for housing to tank to at least 2012, the S&P to hit 600 or possibly 450 in 2009, and unemployment likely to go over 11% (from the 7.2% reported today). Among bears, these numbers are said to be too optimistic, especially that last. He is most "famous" right now for being one of the first to figure out that deflation has arrived. (He notes that deflation is a good thing; inflation was the problem. Most economists and all governments want to inflate some more, right about now.)

Here's today's update, where he notes that unemployment is really 13.5% -- not the more presentable 7.2% that is making headlines:

There is no official definition of depression. Here is mine: When the U-6 unemployment rate rises above 12.5 in conjunction with a stock market that is down close to 50%, the CPI is negative, and nominal wages are stagnant, it's an economic depression. We are in one.
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The Fed is desperately trying to get you to borrow. I am suggesting you cut all unnecessary spending cold turkey. We cannot spend ourselves to prosperity. It is simply impossible. Job losses are going to mount, few jobs are safe and the best thing to do is to be mentally prepared to be working fewer hours.

My response to all of this mess is: how absurd!

It is absurd that 99% of economists did not see this coming, could not explain what anyone was doing wrong to cause a recession, cannot explain it now, and are recommending exactly the worst government actions possible.

It is absurd that Greenspan, who actually understood economics once upon a time -- thanks to Ayn Rand -- was the latest and greatest cause of this mess.

It is absurd that there is such a thing as "fractional reserve banking." It is absurd that many Objectivists either don't know what it is or think it could be okay in a capitalist system. It took me two months to figure it out -- I'm very slow -- but make no mistake: FRB is fraud. When a bank cannot pay back its "on demand" deposits on demand, the deposit notes it issued are fraudulent. How hard is that to understand? It would not even matter if there existed (as there can't; ask Iceland) some magical guarantee that depositors would never demand their money at the same time, FRB is legalized counterfeiting all of the time. How much counterfeiting? Try 1000% -- since 10-1 ratios are the norm at American banks. And that is inflation, massive inflation. Inflation causes price bubbles. And bubbles pop when reality crashes the party, sending prices back in line with actual wealth.

It is absurd that popular Objectivist blogs haven't been all over this for years, that there seems to be little sense of how bad the economy is going to get still, and that it hasn't been common knowledge among Objectivists since at least 2005 that housing was going to crash. Sadly I read about Objectivists who bought a house in the last two years, apparently thinking the worst was over.

It's absurd that I haven't seen a single comment by another Objectivist (I mean a real Objectivist, not some libertarian dork) on Mish's posts.

It's absurd that Atlas Shrugged has been out for over 50 years and this is still happening.

But my first point is the most important. How can the entire profession of economics be such a colossal failure? How can the very professionals tasked with understanding the economy be its worst enemy? We can blame politicians, Wall Street, sub-prime flippers, and "bankstas" all we want, but the bottom line is that none of this would have been possible if the economists hadn't been on board, i.e., if the vast majority of professional economists weren't incompetent or corrupt or both. (Most are both: not only do they not understand that a country can't consume its way to prosperity, they are collectivist statists anyway.)

Of course the blame goes back one more step -- to the philosophers and other intellectuals who allow and make possible such irrational economics. Why is your IRA or 401K a bad dream? Because philosophy PhD's couldn't care less about reality.

And with that final insight, I realize none of this is really absurd; it is ugly but it makes sense: social collapse is the only thing that can follow -- sooner or later -- the intellectual collapse of the 19th and 20th centuries, which was fueled by the philosophical collapse that began, ironically, in the Enlightenment, by the arch-enemy of reason: Kant -- and the monster he unleashed on Germany and the world: Hegel.

I end with a quote:

Inflation is a man-made scourge, made possible by the fact that most men do not understand it. It is a crime committed on so large a scale that its size is its protection: the integrating capacity of the victims' minds breaks down before the magnitude -- and the seeming complexity -- of the crime, which permits it to be committed openly, in public. For centuries, inflation has been wrecking one country after another, yet men learn nothing, offer no resistance, and perish -- not like animals driven to a slaughter, but worse: like animals stampeding in search of a butcher.

Ayn Rand, "Egalitarianism and Inflation", 1974, in Philosophy: Who Needs It