Is The Austrian School Wrong About Inflation?

Includes: GLD, PERM, SLV
by: Shaun Connell

Ron Paul, Peter Schiff, and dozens of other high-profile Austrian economists and investors have been embarrassingly wrong about their monetary predictions. So what gives?

I realize there's no monolithic "Austrian economists" group that represents all Austrians. That should be a given. But it's unavoidable that folks like Ron Paul, Peter Schiff, and others have made a huge series of predictions for years and years about the dramatic, hyperinflationary collapse of the dollar. And they've been wrong.

Whenever someone makes a prediction that doesn't come true, there's always a reason for it. Either something unexpected occurred that the person didn't foresee, or his or her understanding of the event itself is flawed. I think both are likely going on here.

Please note that I'm not critiquing Austrian economics. I'm critiquing the people who associate themselves with the school of thought, and their understanding of the monetary system, and their incredibly wrong predictions. I absolutely adore the Austrian Business Cycle Theory, Hayek, Menger, Mises, and the whole lot.

The Predictions: Hyperinflation, Doom and a Return to Gold

It's become almost a way of life for Austrians to discuss gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) like they're the only sure things and hyperinflation like it's immediately around the corner. This is a broken approach to both topics. But let's look at specifics.

Ron Paul said in 1979:

I believe such a [gold] standard to be not only desirable and feasible, but absolutely necessary if we aim to avoid the very real possibility of hyperinflation in the near future, and economic collapse.

Ron Paul hasn't been quite over the last 30+ years, either. He's repeatedly made almost identical claims for literally decades. He's not alone, not by a long shot.

Peter Schiff said in 2009:

The whole idea is to get out of the US Dollar. It is on the verge of collapse. The people who don't get out of the US dollar are going to be completely broke and that is obvious. Look at what Ben Bernanke did. Interest rates are zero. Money is free. Bernanke is going to run up printing presses as fast as he can. This is pure inflation Latin American style. This is hyperinflation; this is Zimbabwe; this is the identical monetary policy of the Weimar Republic.

James Turk wrote in 2009 in an article entitled "On the Cusp of Hyperinflation" that "hyperinflation of the U.S. dollar is imminent". Not only was he wrong, but he was wrong in a big way -- the dollar has had plenty of rallies since then.

I could go on and on. Doug Casey, Terry Coxon, etc. The predictions are there. And the predictions are wrong.

So Should We Dump Austrian Economics?

Heck no. "Hyperinflation" and melodramatic predictions aren't at all inherently connected to the principles and theories of Austrian economics, which is one of the reasons Austrian Murray Rothbard wrote in "The Case for a 100 Percent Gold Dollar":

I am not saying that fiat money, once established on the ruins of gold, cannot then continue indefinitely on its own. Unfortunately … if fiat money could not continue indefinitely, I would not have to come here to plead for its abolition.

It's not Austrian economics itself that's broken necessarily, because not all Austrians believe in hyperinflation. Not all Austrians even believe in the quantity theory of money (I don't), as Professor Fekete has been pointing out for years.

Just because there's more of something doesn't mean that it's all in the market in the same way -- and balance sheet cash isn't the same for financial organizations as cash sitting in the accounts of formerly poor people. Not all money is spent the same way or even behaves the same way.

There are plenty of different approaches to be taken. The first is, like I've written about before, simply to look at the data and see if the data was understood correctly. The money in circulation was much less than most were led to believe because credit was drying up and little money was actually flowing.

The next option would be to evolve with Austrian economics. Just as Keynesianism has changed, so too should the Austrian school. The strength of the school is not remotely touched, with the ABCT being proven repeatedly, the pointless use of aggregate data failing repeatedly, and the other tenets being shown to be validated again and again.

What This Means for Investors

This isn't just about pointless economics. Threat of hyperinflation is essentially the biggest danger to one's investment that is romanticized constantly by free-market economists.

The obvious lesson to learn would be something Harry Browne once said:

The best kept secret in the investing world: Almost nothing turns out as expected.

This just gives more credibility to Harry's permanent portfolio, a strategy that includes cash and bonds, even though hyperinflation is one reason so many people stayed away from those two assets while they've done wonderful.

There's a reason they call it the "permanent" portfolio -- it uses asset allocation and dollar cost averaging to get returns. There's a permanent portfolio mutual fund (MUTF:PRPFX) and even a new ETF (NYSEARCA:PERM).


When you make predictions and they don't come true, you must re-evaluate your original theory. Most of the predictions about hyperinflation were wrong, as we are not in danger of hyperinflation, as I've written before.

It's simply not in the cards. And yet, plenty of mainstream Austrians have predicted it.

We don't need to throw out Austrian economics -- we need to look at how the data was approached by the investors, or we just need to understand that the overly simplistic quantity theory of money is wrong, and find something to replace it with. Professor Fekete has started a movement to bring back the old real-bills doctrine to Austrian economics, essentially changing a fundamental approach to inflation.

One thing is sure: something has to give. I have no doubts that the lessons learned from the last 10 years will completely revolutionize the Austrian school, and I look forward to it.

Disclosure: I own physical gold and silver and will be buying more in the near future.