"...We've said that you're welcome to teach any of the great socialist
thinkers so long as you make it very clear that they were wrong!"
-Bruce, University of Wallamalloo,
Monty Python's Bruce's sketch
(By the way, you throw Ghandi's work right out of the window when you do that. He was unapolagetically Socialist.)
Among Washington D.C.'s most entrenched and well financed hypocrites you find a similar attitude. In these elite circles, there is an immediate and unfortunate comparison to Soviet Russia's worst excesses and any domestic spending that directly benefits taxpayers and does not result more citizens dead or imprisoned. It has reached the pinnacle of political stupidity in the pointless and expensive standoff we are calling "the Sequester". How did we get to this pinnacle of political stupidity?
We can look at the personal relationship of two of the greatest economists of the 20th century-Fredrick Hayek and John Maynard Keynes and see the roots of our modern malaise. If we look at what was said to one another in regard to their theories, we can see very clearly where we are economically and what we need to do to escape this malaise.
The two men knew each other and for all the blood, money, misery and death brought about by a feud between Schools of Economics, they actually agreed with one another on many points.
When it came to Hayek's book "The Road to Serfdom" J.M Keynes himself said,"In my opinion it is a grand book.... Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement." And is important to realise, despite the knee jerk reaction of libertarian zealots, Keynes was not a communist.
Keynes was a British Lord, whom as an investor, saw the fund he managed quintuple in a time of 2 World Wars and a Depression. One may hate his guts because he's an advocate of policies that use government to directly benefit the population, but at the end of the day, the man knew his markets. It was where he worked and where he made his fortune.
The problem Hayek had wasn't with Keynes himself as much as it was with the cult of personality around him and the people who latched on to his philosophy with zeal.
" I asked him if he wasn't getting alarmed about what some of his pupils were doing with his ideas. And he said," Oh, they're just fools. These ideas were frightfully important in the 1930s, but if these ideas ever become dangerous, you can trust me—I'm going to turn public opinion around like this." And he would have done it! I'm sure that in the post-war period Keynes would have become one of the great fighters against inflation.-F.A.Hayek
The conflict between these ideas has really never been resolved. We find ourselves fighting many of these same battles today. It his at the heart of the moronic and unpopular Sequester cuts.Consider this sniping back and forth between the two men and their friends on the pages of the London Times in 1932.
Some quotes-
Hayek and company-”The depression has abundantly shown that the existence of public debt on a large scale imposes frictions and obstacles to readjustment very much different than the friction and obstacles imposed by private debt.”
Keynes and company-“When a man economizes in consumption, and lets the fruits of his economy pile up in bank balances or even in the purchase of existing securities, the released resources do not find a new home waiting for them…their entry to investment is blocked by lack of confidence.”...“If the citizens of a town wish to build a swimming-bath, or library, or a museum, they will not, by refraining from doing this, promote a wider national interest.’
But consider where we are right now. Unemployment has been needlessly and unacceptably high and a mere buzzword for political demagogues with a callous disposition to the real misery caused by joblessness for years. We have weathered a historic economic crisis on par with the Great Depression and yet we remain the world's default currency with 4/5s of our external debt demoninated in US dollars. Indeed, the rest of the world is a basket case wanting to invest in what they see as the dominant, stable, and secure world power. Interest rates are at historic lows. Granted they will rise eventually, but foriegn investors are still willing to take a negative return on our T-Bills when adjusted for inflation.
Despite this, there has been an atmosphere among D.C. elitists that still urges a deflationary path at a time of high unemployment with assurances that things will be better afterwards. This, by the way, was the policy of Heinrich Bruning, the last Chancellor of the Weimar Republic before Hitler was appointed Chancellor by Bismark. As an overcompensating reaction to the Hyperinflation of the 20s, he pursued a deflationary policy at a time of high unemployment...and we all know what happened next.
I think we have to ask ourselves as this incredibly out of touch, elitist and unpopular Congress tries to take us down the same path, have we reached the same point with Hayek's followers that we reached with Keynes's followers. Have we reached a point where Hayek's cult of personality and the people who latched on to his philosophy with zeal are cancerous tumors in need of removal?
Lord Keynes felt that Hayek's work was not practical.And of course this leads to larger questions regarding the practicality and rationality of markets. That subject is deserving of it's own column. I'm of the opinion that markets are irrational, at least short term.
"What we need therefore, in my opinion, is not a change in our economic programmes, which would only lead in practice to disillusion with the results of your philosophy; but perhaps even the contrary, namely, an enlargement of them. Your greatest danger is the probable practical failure of the application of your philosophy in the United States." J.M. Keynes to Hayek (Hoover, Kenneth R. Economics as Ideology. Rowman and Littlefield Publishers(2008) p. 152 ISBN 0-7425-3113-9)
As we accept higher risk at smaller airports, with underperforming schools producing people corporations don't want to hire because of a need to reteach and retrain, we need to ask ourselves this difficult question- Have we reached the practical failure of the application of Hayek's philosophy in the United States?
I believe the Sequester is one of many proofs that yes we have indeed come to that point.
We can look time and time again at the talking points which are repeated by Hayek's modern devotees and see that they do fall apart one by one upon inspection of details.
Not quoting any one person as much as I'm rehashing things said with complete authority over the past few years my people whom I know have a predisposition to Austrian Economics. While these may not be direct quotes from Hayek, they are espoused by the modern day disciples who are the mirror image of the fools Keynes refered to when talking about the possibility of his ideas becoming dangerous.
1. Central Banking (the Federal Reserve) spending money wastefully.
" all this easing is simply, in my opinion, the Federal Reserve trying to bail out bad fiscal policy. And I think the costs are clearly outweighing the benefits of this." Paul Ryan on CNBC 9-7-12
2. Central Banking (the Federal Reserve) is causing hyperinflation.
"You took over the Fed in 2006...and I have an ounce of silver here...and this ounce of silver would buy in 2006 over 4 gallons of gasoline, today it will buy almost 11 gallons of gasoline, that's preservation of value and that's what the market has always said should be money...why shouldn't there be competeing currencies" Ron Paul, Feb 29, 2012, to Ben Bernanke referencing Hayek
The Federal Reserve under Bernanke has is actually less inflationary than Greenspan's tenure. and is only outdone by WIlliam Martin Jr.'s tenure as Fed Chairman. Unemployment is higher, but that problem has been activley worsened by Hayek's followers in Congress. More on that point later.
3 Higher inflation destroys jobs
"If Krugman and Bernanke were correct in believing inflation has a positive influence on the workforce, Zimbabwe and Argentina would both be paragons of how to achieve full employment... an economy can suffer through a recession while experiencing either inflation or deflation. But when an economy experiences a significant increase in the rate of inflation, it nearly always ends up with an unemployment rate that goes along for the ride." Michael Punto , 5/1/12
But the Fed's quauntitative easing actually is responsible for saving or creating more than 2 million jobs.
4.Tying the value of the dollar to inflation is a cure for fiscal woes
Ryan has proposed "...tying the value of the dollar to a basket of commodities. The Fed’s only job under this policy would be to keep the value of the dollar in line with the value of the commodities in the basket. The pursuit of stable employment or any other goal would interfere with this mission."
But this would lead to more price instability (and misery and eroded wealth due to inflationary pressures). There was 4.4 more times price variation before the Fed got it's dual mandate in 1978 than afterwards.
The Hayek disciples may have great intentions...but I will leave it the reader to remember their Milton and the famous quote about what the road to hell is paved with!
And if the goal is indeed a balanced budget, the Sequester is entirely inadequate as a remedy. Our external debt is 14.71 Trillion dollars. We would need to go through budget cuts just as draconian 13 more times in order to achieve a balanced budget.
The cruel and shortsighted cuts to discretionary budgets include $581 billion from Border Security at a time when drug prohibitition is responsible for cartels replacing the Mexican government in many places along our border, 323 billion from the Center for Disease Control at a time whe antibiotic resistance is on the verge of becoming a large scale threat, and closing 149 air traffic towers in small rural areas.
Are these results of Austerity really an important criteria for a foriegn investor?
Is there a foriegn firm that is looking at Cyprus about to leave the Euro and thinking "I'll need to put this money my investors have trusted me with in a safe place. Will it be in the world's default currency or the currency that may just be on the verge of imploding with various counties abandoning it because staying in leads to a permanent state of austerity?"
The answer is, probably there are. Think about the amount of bluster and misinformation in the Financial Opinion machine at any given time. The person buying worthless securities has to believe something. Markets are not always rational short term. I've dealt with this before, recently on the subject of Peter Schiff and the actual accuracy of his predictions and the returns on his funds. But the person throwing investor's money away for that particular reason strikes me as not a significant part of the long term macro economic equation.
Some investors have the attitude of vultures and are looking to scavange the dead for meat still on the bones. There are others like Investor's Business Daily's William O'Neil whose motto is buy high and sell higher.They are looking for thriving countries and companies to invest in. They are convinced that what they buy will be worth more in the future. And every time, every single time I've looked at IBD's selections, as a whole, they routinely beat the Dow. When the Peter Schiffs of the world are selling their deflationary Vulture brand snake oil, it is important to remember that they do not speak for all investors.
Indeed, we can find a a global investment management firm where it is admitted rather openly that the prevailing view on hyperinflation (that it is caused by governments haphazardly printing money) is wrong. An honest view on a case by case basis shows that hyperinflation is caused by a combination of large supply shocks, big debts denominated in foriegn currenct ( I already mentioned 4/5 of our external debt is denominated in dollars), and a distributive conflict transmission mechanism.
To quote GMO, "...But if the rise in money wages is brought into the story, the part which each plays can be clearly seen. With the collapse of the mark in 1921, import prices rose abruptly, dragging home prices after them.The sudden rise in cost of living led to urgent demands for higher wages. Unemployment was low . . . profits were rising with prices, and the German workers were faced with starvation. Wage rises had to be granted."
We do NOT have low unemployment! That's the problem. That's the pain! The U6, the real measure of unemployment that takes into account discouraged unemployed and part time employees that want to go full time but can't is at 14.9% for Febuary 2013!
What's more, this trinity of pro-austerity stooges-Boehner, Cantor and Ryan probably already know this. When it comes to looking how they voted when it came to bringing about this defict with Iraq War appropriations,each of them voted to give away just as much money, if not more to Defense Contractors. This concern with our budget they profess when cameras are rolling is insincere. The record shows them to be military Keynsians!
That is the saving grace for Hayek's memory. That as much as Washington D.C.'s most entrenched and well financed hypocrital elites quote Hayek...it is really just lip service.
His theories may be well meaning and I can agree that securities should ideally have something real backing them up, but his followers being insincere in their devotion shows what they really believe. When it comes to real markets and the way they behave, it is Keynes not Hayek who displays a theory in line with the way things actually function. When it comes to idealism, I stand with Hayek in the valid criticism of the bad effects of easy credit. Too Big to Fail banks lending CDOs to themselves through easy credit and driving housing prices up is a recent proof of both Keynsesians criticism of the instability of the Investment portion of the Macroeconoic equation and Hayek's criticism of those bad effects. The two are in agreement when it comes to condemning a taxpayer funded derivatives casino. Renewing an equivelant of the Glass Steagal Act which allowed mergers of commercial and investment banks is one of the best things we could ever do. And I think both economists would agree were they around today.
Now would someone- the government, the private sector, the Fed,I don't care who-do something about Border Security, Antibiotic resistance, and airport safety? And Hi Speed Rail (like the rest of the civilized world)? And a transition to an energy future where fossil fuels aren't contributing to climate change? And adequately fund schools, firemen and police nationwide?
Of course that would mean reversing course from Austerity and having Hayek's supposed followers in DC mess themselves. But that's what crybabies do!
Among Washington D.C.'s most entrenched and well financed hypocrites you find a similar attitude. In these elite circles, there is an immediate and unfortunate comparison to Soviet Russia's worst excesses and any domestic spending that directly benefits taxpayers and does not result more citizens dead or imprisoned. It has reached the pinnacle of political stupidity in the pointless and expensive standoff we are calling "the Sequester". How did we get to this pinnacle of political stupidity?
We can look at the personal relationship of two of the greatest economists of the 20th century-Fredrick Hayek and John Maynard Keynes and see the roots of our modern malaise. If we look at what was said to one another in regard to their theories, we can see very clearly where we are economically and what we need to do to escape this malaise.
The two men knew each other and for all the blood, money, misery and death brought about by a feud between Schools of Economics, they actually agreed with one another on many points.
When it came to Hayek's book "The Road to Serfdom" J.M Keynes himself said,"In my opinion it is a grand book.... Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement." And is important to realise, despite the knee jerk reaction of libertarian zealots, Keynes was not a communist.
Keynes was a British Lord, whom as an investor, saw the fund he managed quintuple in a time of 2 World Wars and a Depression. One may hate his guts because he's an advocate of policies that use government to directly benefit the population, but at the end of the day, the man knew his markets. It was where he worked and where he made his fortune.
The problem Hayek had wasn't with Keynes himself as much as it was with the cult of personality around him and the people who latched on to his philosophy with zeal.
" I asked him if he wasn't getting alarmed about what some of his pupils were doing with his ideas. And he said," Oh, they're just fools. These ideas were frightfully important in the 1930s, but if these ideas ever become dangerous, you can trust me—I'm going to turn public opinion around like this." And he would have done it! I'm sure that in the post-war period Keynes would have become one of the great fighters against inflation.-F.A.Hayek
The conflict between these ideas has really never been resolved. We find ourselves fighting many of these same battles today. It his at the heart of the moronic and unpopular Sequester cuts.Consider this sniping back and forth between the two men and their friends on the pages of the London Times in 1932.
Some quotes-
Hayek and company-”The depression has abundantly shown that the existence of public debt on a large scale imposes frictions and obstacles to readjustment very much different than the friction and obstacles imposed by private debt.”
Keynes and company-“When a man economizes in consumption, and lets the fruits of his economy pile up in bank balances or even in the purchase of existing securities, the released resources do not find a new home waiting for them…their entry to investment is blocked by lack of confidence.”...“If the citizens of a town wish to build a swimming-bath, or library, or a museum, they will not, by refraining from doing this, promote a wider national interest.’
But consider where we are right now. Unemployment has been needlessly and unacceptably high and a mere buzzword for political demagogues with a callous disposition to the real misery caused by joblessness for years. We have weathered a historic economic crisis on par with the Great Depression and yet we remain the world's default currency with 4/5s of our external debt demoninated in US dollars. Indeed, the rest of the world is a basket case wanting to invest in what they see as the dominant, stable, and secure world power. Interest rates are at historic lows. Granted they will rise eventually, but foriegn investors are still willing to take a negative return on our T-Bills when adjusted for inflation.
Despite this, there has been an atmosphere among D.C. elitists that still urges a deflationary path at a time of high unemployment with assurances that things will be better afterwards. This, by the way, was the policy of Heinrich Bruning, the last Chancellor of the Weimar Republic before Hitler was appointed Chancellor by Bismark. As an overcompensating reaction to the Hyperinflation of the 20s, he pursued a deflationary policy at a time of high unemployment...and we all know what happened next.
I think we have to ask ourselves as this incredibly out of touch, elitist and unpopular Congress tries to take us down the same path, have we reached the same point with Hayek's followers that we reached with Keynes's followers. Have we reached a point where Hayek's cult of personality and the people who latched on to his philosophy with zeal are cancerous tumors in need of removal?
Lord Keynes felt that Hayek's work was not practical.And of course this leads to larger questions regarding the practicality and rationality of markets. That subject is deserving of it's own column. I'm of the opinion that markets are irrational, at least short term.
"What we need therefore, in my opinion, is not a change in our economic programmes, which would only lead in practice to disillusion with the results of your philosophy; but perhaps even the contrary, namely, an enlargement of them. Your greatest danger is the probable practical failure of the application of your philosophy in the United States." J.M. Keynes to Hayek (Hoover, Kenneth R. Economics as Ideology. Rowman and Littlefield Publishers(2008) p. 152 ISBN 0-7425-3113-9)
As we accept higher risk at smaller airports, with underperforming schools producing people corporations don't want to hire because of a need to reteach and retrain, we need to ask ourselves this difficult question- Have we reached the practical failure of the application of Hayek's philosophy in the United States?
I believe the Sequester is one of many proofs that yes we have indeed come to that point.
We can look time and time again at the talking points which are repeated by Hayek's modern devotees and see that they do fall apart one by one upon inspection of details.
Not quoting any one person as much as I'm rehashing things said with complete authority over the past few years my people whom I know have a predisposition to Austrian Economics. While these may not be direct quotes from Hayek, they are espoused by the modern day disciples who are the mirror image of the fools Keynes refered to when talking about the possibility of his ideas becoming dangerous.
1. Central Banking (the Federal Reserve) spending money wastefully.
" all this easing is simply, in my opinion, the Federal Reserve trying to bail out bad fiscal policy. And I think the costs are clearly outweighing the benefits of this." Paul Ryan on CNBC 9-7-12
2. Central Banking (the Federal Reserve) is causing hyperinflation.
"You took over the Fed in 2006...and I have an ounce of silver here...and this ounce of silver would buy in 2006 over 4 gallons of gasoline, today it will buy almost 11 gallons of gasoline, that's preservation of value and that's what the market has always said should be money...why shouldn't there be competeing currencies" Ron Paul, Feb 29, 2012, to Ben Bernanke referencing Hayek
The Federal Reserve under Bernanke has is actually less inflationary than Greenspan's tenure. and is only outdone by WIlliam Martin Jr.'s tenure as Fed Chairman. Unemployment is higher, but that problem has been activley worsened by Hayek's followers in Congress. More on that point later.
3 Higher inflation destroys jobs
"If Krugman and Bernanke were correct in believing inflation has a positive influence on the workforce, Zimbabwe and Argentina would both be paragons of how to achieve full employment... an economy can suffer through a recession while experiencing either inflation or deflation. But when an economy experiences a significant increase in the rate of inflation, it nearly always ends up with an unemployment rate that goes along for the ride." Michael Punto , 5/1/12
But the Fed's quauntitative easing actually is responsible for saving or creating more than 2 million jobs.
4.Tying the value of the dollar to inflation is a cure for fiscal woes
Ryan has proposed "...tying the value of the dollar to a basket of commodities. The Fed’s only job under this policy would be to keep the value of the dollar in line with the value of the commodities in the basket. The pursuit of stable employment or any other goal would interfere with this mission."
But this would lead to more price instability (and misery and eroded wealth due to inflationary pressures). There was 4.4 more times price variation before the Fed got it's dual mandate in 1978 than afterwards.
The Hayek disciples may have great intentions...but I will leave it the reader to remember their Milton and the famous quote about what the road to hell is paved with!
And if the goal is indeed a balanced budget, the Sequester is entirely inadequate as a remedy. Our external debt is 14.71 Trillion dollars. We would need to go through budget cuts just as draconian 13 more times in order to achieve a balanced budget.
The cruel and shortsighted cuts to discretionary budgets include $581 billion from Border Security at a time when drug prohibitition is responsible for cartels replacing the Mexican government in many places along our border, 323 billion from the Center for Disease Control at a time whe antibiotic resistance is on the verge of becoming a large scale threat, and closing 149 air traffic towers in small rural areas.
Are these results of Austerity really an important criteria for a foriegn investor?
Is there a foriegn firm that is looking at Cyprus about to leave the Euro and thinking "I'll need to put this money my investors have trusted me with in a safe place. Will it be in the world's default currency or the currency that may just be on the verge of imploding with various counties abandoning it because staying in leads to a permanent state of austerity?"
The answer is, probably there are. Think about the amount of bluster and misinformation in the Financial Opinion machine at any given time. The person buying worthless securities has to believe something. Markets are not always rational short term. I've dealt with this before, recently on the subject of Peter Schiff and the actual accuracy of his predictions and the returns on his funds. But the person throwing investor's money away for that particular reason strikes me as not a significant part of the long term macro economic equation.
Some investors have the attitude of vultures and are looking to scavange the dead for meat still on the bones. There are others like Investor's Business Daily's William O'Neil whose motto is buy high and sell higher.They are looking for thriving countries and companies to invest in. They are convinced that what they buy will be worth more in the future. And every time, every single time I've looked at IBD's selections, as a whole, they routinely beat the Dow. When the Peter Schiffs of the world are selling their deflationary Vulture brand snake oil, it is important to remember that they do not speak for all investors.
Indeed, we can find a a global investment management firm where it is admitted rather openly that the prevailing view on hyperinflation (that it is caused by governments haphazardly printing money) is wrong. An honest view on a case by case basis shows that hyperinflation is caused by a combination of large supply shocks, big debts denominated in foriegn currenct ( I already mentioned 4/5 of our external debt is denominated in dollars), and a distributive conflict transmission mechanism.
To quote GMO, "...But if the rise in money wages is brought into the story, the part which each plays can be clearly seen. With the collapse of the mark in 1921, import prices rose abruptly, dragging home prices after them.The sudden rise in cost of living led to urgent demands for higher wages. Unemployment was low . . . profits were rising with prices, and the German workers were faced with starvation. Wage rises had to be granted."
We do NOT have low unemployment! That's the problem. That's the pain! The U6, the real measure of unemployment that takes into account discouraged unemployed and part time employees that want to go full time but can't is at 14.9% for Febuary 2013!
What's more, this trinity of pro-austerity stooges-Boehner, Cantor and Ryan probably already know this. When it comes to looking how they voted when it came to bringing about this defict with Iraq War appropriations,each of them voted to give away just as much money, if not more to Defense Contractors. This concern with our budget they profess when cameras are rolling is insincere. The record shows them to be military Keynsians!
That is the saving grace for Hayek's memory. That as much as Washington D.C.'s most entrenched and well financed hypocrital elites quote Hayek...it is really just lip service.
His theories may be well meaning and I can agree that securities should ideally have something real backing them up, but his followers being insincere in their devotion shows what they really believe. When it comes to real markets and the way they behave, it is Keynes not Hayek who displays a theory in line with the way things actually function. When it comes to idealism, I stand with Hayek in the valid criticism of the bad effects of easy credit. Too Big to Fail banks lending CDOs to themselves through easy credit and driving housing prices up is a recent proof of both Keynsesians criticism of the instability of the Investment portion of the Macroeconoic equation and Hayek's criticism of those bad effects. The two are in agreement when it comes to condemning a taxpayer funded derivatives casino. Renewing an equivelant of the Glass Steagal Act which allowed mergers of commercial and investment banks is one of the best things we could ever do. And I think both economists would agree were they around today.
Now would someone- the government, the private sector, the Fed,I don't care who-do something about Border Security, Antibiotic resistance, and airport safety? And Hi Speed Rail (like the rest of the civilized world)? And a transition to an energy future where fossil fuels aren't contributing to climate change? And adequately fund schools, firemen and police nationwide?
Of course that would mean reversing course from Austerity and having Hayek's supposed followers in DC mess themselves. But that's what crybabies do!
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