Austrians Insist The Sky Is Falling - It's Not

by: Dana Blankenhorn


Whenever stock prices fall, Austrian economists tell us the end of the economy is near.

In the Austrian view, economics are a steady-state world where technology is meaningless.

Follow the data, and keep the faith in church.

I don't like Communism. I find it faith-based, supposition and argument taking the place of data.

I have the same problem with Austrian economics. It can never fail, it can only be failed by people who aren't willing to create the pain required to restore discipline to the economy. There is a reason the Austrians are all in America. They were blown out of Europe by the events of the Great Depression, then hired by American oligarchs to speak for their interests.

What are those interests? They are the interests of the money that exists, and its continuing attempts to turn that money into enduring political power on behalf of those who have it. Austrians believe in a steady-state economy in which money can only be represented by some "hard asset" like gold, and where it need never move. It is a world where every unpaid loan is a disaster because it represents the interests only of those who make the loans.

Austrians ignore technology and they ignore data, except where a random number can be pulled out of the past to justify their eternal position. I prefer data, the more the better. I like Thomas Piketty less for his conclusions than by his willingness to spend 10 years digging up 200 years of hard data and let that drive his conclusions, rather than the other way around. My great wish is that Piketty's opponents would base something on real data, treating what they do more as a science and less as a liberal art, rather than in the same kind of quasi-religious belief that drove Karl Marx.

The fact is waves of technology change are always increasing the need for money because money is used to exchange value. That's why Richard Nixon broke money's ties with metal in 1971. Advisors from California's tech center convinced him that it needed to be done and that ruinous deflation was the only alternative. Austrians consider this an historic mistake. I call it the birth of Moore's Law of economics. It's what we call a data point.

Yet with every fall in stock prices, like the current one, up pops an Austrian like David Stockman to proclaim, "the end is near." He was saying the same things in 2013, insisting the actions that kept the Great Recession from becoming a second Great Depression represented crony capitalism at its worst.

All the Austrians are certain this is 2008 all over again. Marc Faber is absolutely certain of it. So is Ron Paul. Their views appeal to people who see the economic game as rigged, and who are looking for simple answers to complex questions, to stories where there is an ending "once and for all."

The Austrians predicting imminent doom were wrong in 2013 and wrong now. What matters most in money is whether there is value to justify the money supply. There's not enough value in oil to justify the price of the Russian Ruble, or the Saudi Riyal, so they go down. There isn't enough to justify the price of the Mexican Peso or the Canadian Dollar, so they go down.

There is plenty of value to justify the value of the American dollar. That's why, despite the infusion of dollars by the Federal Reserve in 2008, the dollar has continued to rise in value. Technology that crushed logistics costs in the 1980s, crushed sales costs in the 1990s, and crushed management costs in the 2000s, and is now crushing the cost of making markets.

As technology moves into crushing the costs of healthcare systems and transportation systems, more money will be needed to account for that value, not less, or deflation will result. Doesn't the iPhone, a supercomputer you can hold in one hand, from which you can instantly learn the answer to any question and order any product from anywhere, for delivery within a few days, change anything?

What we have is not a money spiral, but a deflationary spiral. We don't have too much money, we have too little moving around. The dollar isn't worthless, it's more valuable than it has been in years. Prices aren't threatening to skyrocket, they're actually falling.

What the economy needs today is more spending, not less. If the private sector won't step up and recycle their wealth then maybe the government needs to do it for them. It's an economic argument as old as the Erie Canal.

Let's whip deflation now, and deal with inflation when the data says it's real. If there was a problem with how the 2008 crisis was solved it was that the money that went out, went out to the wrong people.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.