Friday, October 24, 2008

Weekend reading

Here are some recommended links for the weekend.

1. Everything you ever wanted to know about Austrian economics, but were afraid to ask.

Heard of Mises? And Hayek? Intimidated by titles like "The Theory of Money and Credit" and "Nation, State, and Economy" but want to know what all the fuss is about? Worry no more -- check out these awesome powerpoints and you will have a good understanding of the Austrian Business Cycle Theory, and a weak understanding of Keynes (who has dominated macroeconomics for 80 years now)

First read this: Austrian Business Cycle Theory (ppt)
Then this: Keynes and Hayek: Head to Head (ppt)

2. Everything you ever wanted to know about fiat money, but were afraid to ask.

Mosler is mad. Fiat money is mad. The combination is delicious. Check this out:
We are now in a position to demonstrate our proposition: the natural rate of interest is zero. First, to reiterate the argument thus far: Under a state money system with flexible exchange rates, the monetary system is tax-driven. The federal government, as issuer of the currency, is not revenue-constrained. Taxes do not finance spending, but taxation serves to create a notional demand for state money. Spending logically precedes tax collection, and total spending will normally exceed tax revenues. The government budget, from inception, will therefore normally be in deficit, which also allows the non-government sector to ‘net save’ state money
It's hard to know quite where to begin with Mosler, so maybe one should just start at the start, and move down. Slowly.

Quick thoughts:
1. As we see firms layoff workers and cut costs in anticipation of difficult economic times, there certainly seems to be something to Keynes' Y = C + I. Being canned does not inspire one to spend, but may result in someone else being canned.

2. That said, viewing cash in the bank as "waste" is looney. People want insurance, and people want to smooth consumption. Savings is it. Seeing all investment be funded by the Government extending a vig to banks is looney.

3. "Stimulus" (inflation) is fine until it is not. Sooner or later, the real economy needs to be rational, and that means that after a boom, malinvestment needs to be shut down and cleared out.

4. Soft money economics sucks for savers. The sooner they can find an alternative, the better. GLD anyone?

5. My belief in the healing power of prices is restored. We're in a situation where things are down from the peak -- leaving bad investors in the hole -- but still too expensive -- keeping good money on the sidelines. A situation which has the government keeping prices in this uncanny valley is a recipe for stagnation. We'll never get back to the top of the bubble, debt just needs to be written off, but we'll never get good money off the sidelines. Stagnation stagnation stagnation.

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