I recently finished reading Thomas E. Woods’ book, Meltdown. This was my first exposure to the Austrian School of economics. Fantastic. It made this passage from the Financial Times’ website this morning make perfect sense. The article was entitled: Bernanke faces US growth mysteries.
It begins as follows:
If Ben Bernanke, Federal Reserve chairman, expected the release of second-quarter growth data to clear up the “unusually uncertain” outlook for the US economy, then he will have been sorely disappointed.
On the surface, the numbers were easy to interpret. Growth over the previous quarter at an annualised rate fell from 3.7 per cent in the first three months of this year to 2.4 per cent in the second. That fits with many other signs that the recovery is slowing down.
The details, however, hide a series of economic mysteries – about how fast the economy can grow, how weak it actually is, and what US consumers have been up to for the past few years – that policymakers will have to solve.
Let us take a moment to focus on that last mystery, and a mystery it most certainly is. The reason Bernanke cannot tell what consumers have been up to is because those very measures that might have revealed their doings are the very same ones that the Fed is constantly tinkering with. Consequently, the true activities of consumers is obscured by the Fed’s interventions. Let us take one example.
According to the Austrian School, interest rates are not artificial constructs, but are an inherent element of the market. Interest rates convey information. For instance, when a large number of depositors put money into a bank (that is, they opt to save instead of to consume), the bank, being flush with cash, will lower interest rates to encourage investors to take out loans. This makes sense in an elementary economics sort of way. The supply of loanable money is great, therefore the price of that money will sink until it meets its corresponding level of demand from those disposed to purchase it. Therefore, in a market free from external interference, low interest rate tells businesses that consumers, by and large, are sitting on the sidelines saving their money for future purchases. Conversely, a high interest rate tells businesses that consumers are not saving, but are consuming immediately available goods.
It should be plainly evident that artificial interference with the interest rate will obscure the true nature of consumer saving or spending. This will, of course, mislead businesses into allocating resources into long-term or short-term projects according to the nature of the distortion. Of course, that is precisely what Bernanke and the Fed do – they tinker with interest rates. When he later finds it a mystery what consumers are up to, that can hardly be surprising. Indeed, it was his own actions that made him ignorant. That fact, in itself, should be ample argument that the Federal Reserve should be abolished. Its own activities interfere with the market to such a degree that their actions can only ever be based on guesswork. They are no more competent to solve a financial mess than a monkey shaking a Magic Eight Ball. And whatever solutions they propose should carry as much weight – even less, when one considers that the solutions that they proposed are the very ones that created the problem in the first place.
Puzzled by the fact that even when they thought they had a handle on the numbers for 2007, 2008, and 2009, those numbers are continually revised downwards. First, this fact strongly suggests that the numbers have been massaged along the way. Second, this also suggests that the government interference in the market plays a role in obscuring the nature of the transactions even after the fact so that unraveling what actually happened is unnecessarily complicated. To my mind, this strongly suggests that government officials are trying to fit the outcomes into predetermined narratives that are not up to the task of accounting for these outcomes. In short, the narrative is wrong; the expectations are fantasy; and the continued course of action should be obviously misdirected. Instead, they scratch their “brilliant” heads and say things like, “‘The recession was unusually long and unusually severe and has proved unusually resistant to unusual amounts of stimulus,’ says Neil Soss, chief economist at Credit Suisse in New York.”
Perhaps its because we are trying to cure a recession caused by excessive spending and regulation by increased spending and regulation. Consider these paragraphs:
There are two ways to read the revisions. One is that the economy is even further from using its full capacity than previously believed – an argument for more easing by the Fed. The other is that the economy’s capacity to grow is less than thought.
Paul Ashworth, senior US economist at Capital Economics, says he leans towards the latter explanation because inflation numbers remain the same. Less growth for the same inflation suggests a lower potential to grow.
Another question is quite how weak the economy actually is. Purchases by US consumers and businesses grew a lot faster in the second quarter than in the first – up by 4.1 per cent from 1.3 per cent – it is just that many of them came from abroad.
Ignoring the impossibility of further easing when the Fed is damn near at zero percent as it is, it is unbelievable that one conclusion that can be reached is that the economy is “even further from using its full capacity than previously believed,” necessitating even more destructive distortion to temporarily prop up a market that is sorely out of whack. In a sense the statement that the economy is not at full capacity is quite true, the economy has been bamboozled into allocating its resources into projects that are unsustainable because of a lack of savings, while other near-term (obtainable) projects are ignored. A properly allocated economy would indeed run at a fuller capacity, by responding to the true nature of consumer demands. Concededly, many of those producers who engaged in long-term projects, for which there are too few resources to complete, will find themselves facing bankruptcy. But, these are the oats that are sown by massive government disruption of the free market. Those companies (and their stockholders) will inevitably feel the pinch for their (inadvertent) mismanagement. But instead of blaming the directors of the company, they should cast their eyes toward Washington.
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