Source link: http://blog.mises.org/10721/rothbard-and-the-post-high-tech-meltdown/

Rothbard and the Post-High-Tech Meltdown

September 28, 2009 by Mises.org Updates

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In his treatise on the Great Depression, Murray Rothbard showed that, unlike the laissez-faire approach, which led to a rapid recovery from the stock-market plunge of 1920 and 1921, the Hoover administration’s interventionist approach worsened a bad economic situation by keeping wages high. Many of the survivors of the high-tech meltdown and dot-com bust took advice from the pages of Rothbard’s treatise when they moved operations offshore to India and China.

India and China not only had large workforces with comprehensive technical educations, they also had the kind of economic foundation that many high-tech and information-sector companies needed: one with an absence of North American-style political participation. Entrepreneurs were free to go about their business and were not beholden to government officials who had generously opened the public purse to provide “investment revenue” or “a safety net.” FULL ARTICLE by Harry Valentine

{ 11 comments }

A. Viirlaid September 28, 2009 at 2:33 pm: I could not agree more.
Harry Valentine has written a gem.

But the governments do not just screw up in the High Tech Sector or in the Green Sector in the manner described by Harry Valentine.

Governments do this everywhere and virtually at all times, thereby affecting the commonest of citizens in his or her daily activities.

This is enabled by many factors, among them:

Our Fiat Currency System
Our Fractional Reserve Banking System
Our Central Bank-Controlled Monetary System
Our Western Governments not heeding their own Constitutions

In my own personal experience during my short life, I have come to a bitter realization as to how governments warp our Money Systems until these Systems threaten to break and then bring us all down.

This Monetary Misbehavior may yet destroy Capitalism as we have known it and as we have learned to enjoy her fruits. Marc Faber certainly seems to think so.

http://www.huffingtonpost.com/2009/09/25/marc-faber-capitalistic-s_n_299720.html

The West may yet end up like the U.S.S.R — on the Scrapheap of History.

The point is that our current system actually FORCES the majority of people to go into Debt over time. Because it does this, it leads to periodic ‘depressions’ as people find they are too far in debt to survive financially. The whole system periodically ‘implodes’ as we get Credit Collapses or Contractions.

For example, house prices go up as people bid them up because they see that ‘saving’ is a useless activity — but why do people behave like this?

Can they not think for themselves? Are they not responsible for ‘overextending’ themselves? I say no, they are essentially not responsible, because of the prevailing system forces. These forces are too strong and immediate. They make the personal assumption of Debt inevitable.

People have learned to think that House prices are always just out of reach, so why not bite the bullet and buy now? They don’t only THINK it, they KNOW IT!

In effect, most of us go into hock because it seems prudent to do so (most of the time).

But this belief and belief-based borrowing is artificially-driven. Why?

Because our paper money is always being slowly devalued on purpose by the excess printing of paper money — the excess occurs because our Monetary Authorities print it faster than the economy grows â€”â€” I am of course talking about NET-NEW money, not just money that replaces torn and worn out paper money. (There are, as Austrians all know, other forces at play here too, like the Fractional Reserve Banking System which, in parallel to Central Banks, encourages Debt and Money Creation.)

The Central Banks print excess money because they think this is good for the economy. And by so doing and also by keeping prevailing interest rates below what they would be in a free market-driven interest rate environment, they help Borrowers get a better deal than they would otherwise.

Naturally Lenders (that is, Savers) get shafted in comparison to Borrowers.

If the Central Banks of the world did not so drastically favor the activity of Borrowing OVER Saving — and if the governments of the world did not so injuriously tax interest income (from Savings), then the activities of Saving and Borrowing would be more logically-driven and more balanced and more likely to be based on Real Economic Opportunities (not cheap-money-created phony opportunities).

We would not have these severe Financial Booms and Busts in our Economies in such damaging fashion. The Central Banks are supposed to ‘smooth’ the ups and downs of regular Business Cycles but instead they exacerbate these ups and downs.

The apparent need for Stimuli every now and then (especially recently) is driven by this out-of-kilter system.

Today, the main reason for the Central Banks and the Governments to do this above-norm spending (via Stimulus Packages) THEMSELVES is that the authorities calculate that the average person is pulling in his or her financial horns — so the authorities will increase apparent economic DEMAND themselves by throwing money into the economy.

They are doing it “on our behalf” because we (in our own personal wisdom) want to save. The authorities know that their past practice of just ‘favoring’ the Borrower over the Saver â€”â€” even at interest rates close to zero in Japan and America â€”â€” is TODAY, on its own, not even remotely ‘enough’ in their minds — people in the collective just won’t borrow enough to make “things happen”.

Of course it looks to our Authorities like “Spending is Bad” now at the personal level — that is what the supposed Paradox of Thrift is all about: http://en.wikipedia.org/wiki/Paradox_of_thrift

But I don’t personally think it is bad to save — what I am trying to point out is that we have a screwy system wherein it makes LESS sense to save because so much is stacked up against it as a ‘logical’ activity.

And this is true most of the time. At least until such time as someone like Paul Volcker comes along to raise interest rates to 20% and then of course we all start Saving like Sober Sailors.

This does not mean I agree with The FED for example — I just say I understand why they think it necessary to discourage saving.

In fact I firmly believe that the Money System needs to have the Activity of Saving encouraged over the long run. It should not be discouraged as it has been over the last 50 years and more. We are destroying ourselves. We are destroying our Children and the chances for their children as well.

TODAY in the midst of this unfolding Economic Tragedy people at the personal level MUST save so that they can save themselves.

The governments may not agree — they want to force us ALL to spend.

That is because they screwed things up So Much in the past by making us spend and borrow too much back then too.

How can borrowing now save us when over-borrowing is what got us into the current mess?

The ‘problem’ is that the whole system is unbalanced and will remain so until we balance out all economic activities — the free market is best placed to do this balancing.

No one person like The FED’s Dr. Ben Bernanke can do it for us or for the system. It is way too much to expect from one merely-mortal man.

That is why the Command Economy will always fail. That is why Central Planning failed in the old Soviet Union.

That is why it will fail in America as well.
greg September 28, 2009 at 2:43 pm: Let me get this straight, should we change our system into a communist system like China?

Investing in China is like playing the futures markets, few winners and a bunch of loosers.

But if they are a much better place to invest, they should work out great for you to live there as well. For me, I could not get past the idea of parents that cut the arms off their kids so they can make more begging on the streets in India.
K Ackermann September 28, 2009 at 2:59 pm: I hate being a jerk, but it has never really stopped me… from being one, I guess. I’m just a big fan of complete information.

First, kudos for the Dali picture. I never associated it with meltdown, but I guess it works for that too.

Not mentioning venture capital leaves the impression that only monetary policy was what enable the tech bubble, and to tie that in with government bureaucrats trying to stimulate the economy using tech implies fiscal policy drove the money to tech. That’s the way I read it.

Having lived through it, I very much believe the dot com boom was a market affair. Company business plans were structured on “burn rates”, and they sought out capital to meet the burn rates as they carved out market share.

Banks don’t like using burn rates as the basis for loans. They don’t like owning companies, and they hate losing money. I’m sure there was some success in obtaining SBIR loans, or even tech grants, but those were barely noise compared to private venture funding.

Even venture funding had a short time horizon – the date of the IPO. It was almost comical observing who could cash in options right away, and who couldn’t following an IPO. There was definitely a preferred class of citizen in that department.

The stock market became the frenzy. In the later stages, there was nothing innovative about a new IPO named BuyMyCrap.com, but the IPO would be oversubscribed by 400%. The government had nothing to do with that. The government is evil, but let’s not blame it for things that happen without it.

It didn’t take the bust for companies to move to Asia. The ones leading that charge were the large, ongoing concerns, and they did it during the good times too.

I think there is legitimate room for debate on cause and effect. Were these companies driven to foreign shores because they were drowning from the high cost of labor, or did a market open for cheap labor that they selfishly, and correctly exploited?

Contrary to some theories, acting in self interest can be collectively harmful in some circumstances. Large capital outflows came back as treasury purchases, which helped keep interest rates low, which helped keep people buying stuff on easy credit, which propped up retail and service employment, which offset job losses to overseas markets.

It’s too bad there is a limit on credit. Things don’t work out so well when that limit is reached. The whole thing unwinds. It’s really quite a dilemma: all those companies with cheap foreign labor want to sell cheap crap here, but cheap is relative, and is often too expensive for an unemployed person.

As for a shakeout in green energy, that is part of the process. The US has all but lost that battle space anyway. Nearly every viable green tech is coming from overseas. The US no longer invests in anything other than short term profit. It is entirely comfortable with sacrificing tomorrow for a better today. That is true both politically and economically. Today has a lobby, tomorrow doesn’t.
A. Viirlaid September 28, 2009 at 6:23 pm: I agree with most of your analysis, K. Ackermann, but have a few issues.

IMO, Monetary Policy is the problem because it actually has a direct effect on the funds that are available to entities like Venture Funds. A lot of venture pools borrowed money from banks as well as other financial intermediaries.

Banks hate losing money.

Well, yes, but they hate another thing almost as much — and sometimes this other thing they hate makes them do things that make them lose money.

(And you’re not a jerk. You are a contributor.)

In other words, Not Making Money (and seeing their competitors make money in their place) for many Banks is the same as Losing Money.

The government had nothing to do with that.

Well, maybe just a bit IMO.

The government is evil, but let’s not blame it for things that happen without it.

Agreed. But I think the systems the governments operate (or at least tolerate) had a lot more to do with it than you seem to imply.

The problem is not Venture Funds or individual speculators or even banks — sure they are all capable of making poor investments even in the absence of MoneyPulation by Central Banks and other tomfoolery enabled by our Money Systems.

IMO however the main culprit is whatever makes money so ‘easy’ at any point in time that decision-makers lose sight of how to make good investment decisions.

Money should always NATURALLY reflect what savers are willing to lend and borrowers to borrow — so that demand and supply set a market price for money — a naturally prevailing interest rate, reflecting terms and assessed riskiness.

In the late 1980-s Japanese retail banks were sending their bankers to their clients’ places of business DOOR-To-DOOR BEGGING those clients to take more loans from the banks.

This is no joke — the banks were in competition with each other to show that money was earning something. Reserves sitting in the vault do nothing. The Central Bank of Japan was offering money at ridiculously low interest rates to the Retail Banking Sector.

Thus money got ‘hot’. And so did the resulting economic activity — virtually for anything.

Whether it be for ‘Eyeballs’, or even for a business that could be established for “some worthwhile endeavor of some unspecified nature”?
It does not matter when money is E-Z.

Please check out this article at the New York Times — Easy Money; Borrowing Asia’s Troubles

http://www.nytimes.com/1997/12/28/weekinreview/easy-money-borrowing-asia-s-troubles.html

Fault All Over

So who’s to blame for all this mess, and what can be done? The Koreans are lambasted for reckless borrowing. And the foreign banks are increasingly singled out for encouraging the reckless borrowing, which for the banks was so profitable.

But the system is also at fault. It periodically creates situations in which money can be borrowed at a low rate in one currency and re-lent in another at a much higher rate.

The loans are invariably short-term, for a year or less, but always with the promise that they will be rolled over indefinitely as long as one currency or another does not lose value.

That is like betting on a lame horse to win. Devaluation always seems to catch lenders and borrowers off guard, although they bounce back for more, the lure of easy money being rather powerful.

The solution, some experts say, is new global regulations or capital controls that impose restrictions on such lending across borders or make it less profitable.

As Mr. Kaufman, the economist and money manager, said, “Markets don’t always work the way they should.”

From January 1991 Fortune article

http://money.cnn.com/magazines/fortune/fortune_archive/1991/01/28/74606/index.htm

The trouble began in September 1985, when finance ministers from industrialized countries met in New York City’s Plaza Hotel to devise a plan to drive down what was then a superstrong dollar.

The goal was to reduce the U.S. trade deficit. As the dollar dropped, of course, the yen rose, hurting Japan’s rich export trade. No surprise there.

But Japan’s policymakers were also confronted with another dilemma: how to maintain a high level of capital investment — deemed critical to Japan’s continuing economic success — when industrial profits, largely led by exports, were collapsing.

To counter the cash shortfall, the Bank of Japan greatly increased the money supply. From 1984 to 1987, annual money supply growth jumped from 7.8% to more than 10%.

To further ease corporate access to cash, the bank lowered the official discount rate — the rate it charges other banks — from 5% to 2.5%, a postwar low.

Financed by cheap loans, Japanese companies launched their biggest peacetime boom in capital spending. Between 1984 and 1989, it increased at an average annual rate of 10.4%, more than twice the rate of growth in the U.S.

By the end of the decade, capital spending had replaced exports as the driving force behind Japan’s economy. The rapid increase of the money supply not only financed Japan’s industrial expansion but spilled over into the economy at large.

Also see how Japanese financial firms deal with clients who they once begged to take their money at

http://search.japantimes.co.jp/cgi-bin/fl20040713zg.html

Other references

http://www.allacademic.com/meta/p_mla_apa_research_citation/0/6/4/2/1/p64212_index.html

http://stocktaleslot.blogspot.com/2005/06/japanese-bubble-economy-of-1980s.html

Still, the academic wonders what many consumers are likely asking: “It’s not as if we haven’t seen it before. Like Japan, the problem starts because of excessive expansion or euphoria, then the banks get a little careless, even reckless when lending money, and then things get out of control.

I don’t know why we never seem to learn from history.”

http://www.thestar.com/Business/article/511664

Also as to your comment about Limits on Credit (true, there are natural limits) please see http://blog.mises.org/archives/008983.asp

Would the companies that went offshore have done that or have done it so quickly if there was not some MoneyPulation going on? I suggest the process would have been a whole lot slower.

The explanation IMO is very simple, as is the mechanism.

Countries like China buy from their exporters those foreign-currency surpluses these exporters don’t need for purchasing foreign goods (commodities for manufacturing, etc.).

But China’s government (and Central Bank) does this buying with newly-printed Chinese paper money. China does this because otherwise its own currency would be driven up in value.

This seems to be initially a good idea. China keeps its currency from appreciating, thus further facilitating its takeover of the world’s manufacturing. It can continue to sell its goods very cheaply, keeping its economy humming. In the long run, it will prove to be a house of cards and will come back to grievously harm China’s economy and people.

This is inevitable with such manipulation of paper money currencies. A system backed by gold-based or other rules-based money-issuance would make such manipulation less likely. As would an international agreement to never again go down such a road.

The Chinese exporting companies need Chinese currency to pay local wages, and to deal within the Chinese economy for some Chinese goods and services, obviously.

After China buys the foreign currency from its exporters (mostly U.S. dollars) it sends these monies to purchase Treasury Bonds in the respective countries (most especially the United States).
newson September 28, 2009 at 6:33 pm: k ackerman says:
“Contrary to some theories, acting in self interest can be collectively harmful in some circumstances. Large capital outflows came back as treasury purchases,…”

sorry, but the massive t-bond purchases were made by the people’s bank of china, not private investors. your criticism is best directed at the central-planners, not the self-interested.
Ribald September 28, 2009 at 11:55 pm: I tend to view most predictions of whether one or another industry will falter or boom with great skepticism, especially when the one making the prediction can only cite one or two vague generalities as the indicators of some future change.

The economic downturn has, indeed, reduced demand for fossil energy. The price falls as a result. Demand for renewables has been affected as well, however. One gets the feeling that not enough justification has been made to support the idea of a green tech bust…

In fact, one could view it just the opposite way: The price of fossil energy has fallen, which means there will be fewer investments in fossil energy. When the recovery is under way, we can expect demand to pick up again, and to affect price disproportionately due to the aforementioned fall in investment, which will in turn spur the renewable energy sector at that time. If the government relinquished subsidies to fossil energy industries, the effect would be that much greater.

This is all fun speculation, but as a predictor of things to come, it is almost worthless without contextual information.

I’d be quite pleased to see many of the predictions made on Mises featured at longbets.org, if only to have a running tally of the successes of Rothbard’s theory in predicting economic phenomena.
K Ackermann September 29, 2009 at 1:58 am: A. Viirlaid, sorry for the late reply to your excellent post. I agree with it all, but I think some of the rolls the government plays would still be filled in its absence. It’s not that I disagree about the problems government causes, it’s that some of the problems are structural independent of the government.

A certain amount of collective behavior would arise in the absence of government. Cartels would form for periods of time, cause distortion, and eventually screw things up and be replaced by some other temporary great idea to maximize arbitrage opportunities.

I have not hit your links yet, but I am looking forward to the one on natural credit limits. This is something that holds great interest to me right now. The data-points are few, but the possible correlations are eye-popping on some of the charts.

I mentioned in another comment a week or so ago that the only 2 times that household debt reached 100% of GDP was in 1928, and 2007.

The process of deleveraging is a very strong force. It has to take place before sustained growth can be renewed, it appears. No policy during the Great Depression really prevented deleveraging in the end, but there are numerous examples from then, and from Japan and elsewhere that attempts to mess with it, only prolong the pain. The goal is to do it in the most efficient way… to salvage what can be salvaged.

Some of the side effects of the new financial instruments possibly play havoc with this process. We see holders of protection swaps favoring bankruptcy over restructuring, because they get the instant payout. We see banks acting in strange ways to protect cash flows affecting CDO tranches because of counter-party obligations.

When someone walks away from an underwater mortgage, who exactly is delevering?

I think it would be the savior of economics if there was a formula for the effects of aggregate debt measured against some other things. It they knew a number which cannot be surpassed without crashing the system, then it would go a long way toward eliminated the lame excuses of ignorance that allowed something stupid and deadly to happen.

Debt does not get nearly enough attention in mainstream economics than it deserves.

If I sound vague, it’s because I don’t really… know what I am talking about. It’s just a sense.
A. Viirlaid September 29, 2009 at 10:09 am: K. Ackermann, your concern-points IMO are valid and, to me, not vague at all.

You are right IMO about what we refer to as ‘government’.

The issues we are discussing are multi-generational.

The average politician IMO is in the ‘government’ for a decade maybe (I don’t have stats on that).

So who actually has ‘ownership’ of these issues?

The tasks of analysis and making recommendations inevitably (and perhaps properly) fall to the academics, to the brain-trusts and think-tanks, and maybe sometimes to government-established inquiries and special commissions and other overview-review boards — and to websites like this one.

The problem appears to be that, as you surmise, no one (other than the lonely voices of people like Ron Paul) is really looking at the underlying causes of the catastrophe we are living through.

Sure they look at the surface, like the various fancy financial instruments and banker pay and Ponzi schemes and other such relative irrelevancies, but what about the entire Money System?

For example the proper role of Central Banks? What did we give up when we gave up the Gold Standard? And so on. (I happen to think that the way the current Money System is currently set up actually leads to the entire economic system operating somewhat like a giant Ponzi scheme, that is then prone to periodic failure.)

That is, who cares about what the Austrians are saying is the root cause?

Because the Austrian School advocates have been warning about the harm of artificial manipulation for a long time.

Your suggestion for example to have a system that on its own, through self-regulation, can control the amount of Total Credit in the System is very valuable.

But who in government is going to deal with that?

For heaven’s sake, instead of reviewing whether The FED has proper roles assigned to it that it can even today carry out successfully, the politicians in Washington want to wash the guilt off their own hands as quickly as possible. They want to give MORE power to The Federal Reserve!

How strange is that?

Total DEBT to me is a measure of DISORDER in a economic system. (But this observation is not limited to only an economic system.)

In physics as you most likely know this is Entropy.

If any system is overwhelmed by too much Entropy, it will tend to fail.

A biological system (for example, your body or our Earth) will die when Entropy is no longer manageable by that system. When the Debt in one part of your body for example is too high, the other organs cannot ‘pay it off’. If you abuse your liver it can heal (with help from the other parts of the body), but not past a too-high point of abuse.

So it is with Economic Debt, as you have indicated.

Too much, and the system will pause and slowly recover and heal itself. ANYTHING we do to slow down or harm the system’s natural tendency to adjust and heal, WILL ONLY make things worse, again as you have pointed out.

So keep up your contributions. They are thought-provoking.

On this site, when any one of us makes a statement that is counter to what others think, they will usually let us know.

Then we can discuss the relevant issues, and have all of our Collective Intelligence improve on these very critical concerns.
K Ackermann September 29, 2009 at 3:59 pm: The tasks of analysis and making recommendations…

Is unfortunately not peer reviewed when it comes to recommendations that reach the ears of policy makers. Lobbyists make most of our policy now.

The problem appears to be that, as you surmise, no one (other than the lonely voices of people like Ron Paul) is really looking at the underlying causes of the catastrophe we are living through.

They are afraid to. You would think it would be possible to haul the ratings agencies in front of a panel to explain exactly how AAA, the highest possible rating, ended up being attached to debt products that were never assessed. There is no conceivable way it could have been a mistake, or oversight. There is no lie that large. Without hyperbole, all the people involved in that charade should be in Gitmo.

Sure they look at the surface, like the various fancy financial instruments and banker pay and Ponzi schemes and other such relative irrelevancies, but what about the entire Money System?

Oh, no – that would politicize the Fed. Do not look behind the curtain. It will crash the system.

The proper role of Central Banks?

It can only be the opposite of whatever they say. Price stability? Fail. Maximize employment? Fail. Regulate? Fail. Dampen cycle extremes? It promotes them. Every they say is a lie. It’s a prerequisite for the job – liar.

“It says here on your application that you were fired from your last 3 jobs for lying. Outstanding! Can I ask what about?”

“I don’t have to tell you anything.”

“When can you start?”

How strange is that?

Here are the options a politician has when making any decision that alters the flow of public money into private hands:
1) Fight us, and we will flush you down the political toilet.
2) Work with us for a longer career, and financial well-being.

In physics as you most likely know this is Entropy.

Physics provides fertile ground for economic analogy. The necessity for having society stratified into different economic classes can be viewed as setting up the potential. In any physical system, a potential is needed to get any work done. Entropy is basically the inability to extract potential – it’s stasis.

I like to compare market signals with transmission line theory. In a perfect market, one that is completely liquid with a buyer for every seller, and all transactions settle instantly, it is like a perfectly matched transmission line. Signals propagate at maximum speed, and with no loss (arbitrage). When liquidity drops, there is a coherency in the market where too many trades want to happen in one direction. It sets up a standing wave which delays and degrades the signal. The transmission line might also turn into an antenna, and pick up false signals and transmit them very efficiently.

I believe the way they package debt as a commodity does exactly that. They could not satisfy the market for debt fast enough. In order to sell more MBS’s and CDO’s, they needed more debt to package up. They even stopped verifying income against loans to scrape up more debt. The buyers of the debt were completely uncoupled from the signals that were being given off in the housing market. The debt was not subject to normal pricing pressures. It was sold in little black boxes that were not to be opened. You were only supposed to peel off the coupons stuck on the outside of the boxes.

So keep up your contributions. They are thought-provoking.

Thank you for the encouragement. Like so many others, I’m groping for answers. I’m ready whenever you want to tell me what they are
A. Viirlaid September 29, 2009 at 5:12 pm: K. Ackermann.

That was great!

You belong here not as one of us, but as one of the Mises.org essayists.

What else can I say — “Well Done!” is about it.

And also, Thank You!
cheapest loans September 30, 2009 at 9:47 am: What behold India from the recession was its peculiar nature of banking, where the common people also has a great role.