Comments (33)

• Phil W

  No doubt Mr. Corrigan may very well know of what he speaks, but the use of run on sentences makes him difficult to understand. Lengthy single and double sentence paragraphs seem to be more ego than information. Maybe it is just me, but this article did not make much sense.
  

  Published: March 4, 2008 9:07 AM

• David C

  I enjoyed the article and laughed out loud in several places - as a quasi-satirical missive targeted at Austrian insiders, it works very well.

  But Phil W is right, in that someone with no appreciation of the Austrian critique of Keynes, and its nuances, won't make head or tail of it. A pity, as those are the people who need to be educated.

  Published: March 4, 2008 9:33 AM

• Dan Stenabaugh

  Mr. Corrigan has again taken me on a canoe ride down a peaceful river where I can flow along with his vision of the economic landscape and come away knowing that I have seen something important, durable and complete. A rich article full of common sense prose and poetry.

  Published: March 4, 2008 9:41 AM

• Byzantine

  Corrigan is an acquired taste.

  Truly though, this is a rigorous explanation of the downstream effects of monetary inflation. It is necessarily complex. Between him and Shostak, I am able to fill in a lot of gaps in my knowledge.

  Published: March 4, 2008 9:43 AM

• Bradford Young

  Dear Mr. Corrigan:

  I write you because I read your article posted to the Mises.org site and sent out as today's daily article. I think your content is worthwhile, but your writing technique blunts your message. I offer this comment with the best of intentions: please do not let your writing get in the way of your point.

  The phrase that caused me to write is your parenthetical "(as is archetypically the case with, say, energy)."
  
  The word "archetypically" is just too much. People do not say that. People say "typically" and they say "an archetype." One may be permitted technically to use it as an adverb, but sometimes it is best not to do a thing just because one can. This is one of those times.

  The combination of "[arche]typically" with ", say," is also too much. Why drive a nail with a sledgehammer?

  You clearly meant, "(as with energy, for example)" but you chose to larder your sentence with superfluous words that muddy your intention.

  I wasn't going to mention the fact that you are unclear on the correct meaning of the word "comprise" but now I have. "Comprise" means "to be made up of" or "to be composed of." When an author chooses to structure his sentence so that the components are the subject rather than the larger entity, he denies himself the use of "comprise" and must be satisfied with "compose" or "constitute."

  If I were so bold as to offer a prescription for your writing ills, it would be to suggest you write five articles without a single adverb or a compound sentence. Don't try to impress your readers with sentences like

  "To recap, what then we find is that not only does the availability of financial capital become wholly divorced from the extent of the pool of physical capital goods; not only does much of that pool become misused (and, hence, ultimately, stripped of its original "capitalness"); but that the wellspring of capital maintenance and augmentation -- namely, voluntary saving -- in concreted over to provide a gaudy, Baroque fountain of greater exhaustive consumption."

  We are not only not impressed, we are confused as to your point.

  Published: March 4, 2008 10:59 AM

• Fred Moeller

  I always learn from Mr Corrigan. He understands and write from the Misesian perspective on a high plane.

  One comment on the above article concerning word usage. In one of the last paragraphs Mr Corrigan states:
  "Squeezing margins as in a vice, this development ........".
  I believe he meant as in a vise or did he? Inflation can certainly be thought of as the main vice of central bankers.

  Published: March 4, 2008 11:06 AM

• S.B.

  Any student of the Saudia Arabia oil boom and bust could see this coming for a long time.

  As a recap, for those who aren't students of it, Saudia Arabia found oil (boom!), Saudia Arabia started to invest lots and lots of money, Saudia Arabia failed to practice risk management of those loans, loans went unpaid; economy busted.

  What we are experiencing is the combination of inflationary boom and the resulting loan boom; resulting in an economy bust.

  Our prices will inevitably go up. Employees and unions will demand that their wages are altered so that their buying power remains even. Very few companies and government agencies will be able to do so.

  People's buying power will decrease, and thus they will make important changes in their purchases. An economy that had developed a huge supply capability for a huge demand, will see a lower demand with the remaining high costs of developing that supply capability. The cost of the product will go up even higher (than just from inflation) due to increased production costs. Sadly, this can become quite cyclical until some balance point is reached.

  The only real solution is to quickly raise the interest rates on loans. This will send a clear message. Real estate developers will have to cut back, since they know that the demand will decrease. Companies will have to cut back on loan-based investments, and become more realistic of how much capital they have and what kinds of growth they can sustain.

  Indeed, people will lose the ability to continue paying for their homes. Which will result in foreclosures, which will lower the value of surrounding homes owned by people who are able to pay their loans, which will result in further difficulties for them (e.g. inability to sell the home, due to the large loss in investment and will instead hold on to it hoping that the houses's value will go back up). Banks will suffer. However, newer, safer, high interest loans will help banks to recover some of their losses.

  And hopefully, we'll see an overall adjustment by consumers to purchase, or invest based on real dollars, instead of imaginary dollars.

  Sadly, Bernake wants the opposite. He loves imaginary dollars, and believes that as long as we have a perception that we are all rich and can be irresponsible, that we will be irresponsible and that will keep the Bush administration from having a federally decided recession. Forget long term consequences. That will be for the next president to deal with.

  
  

  Published: March 4, 2008 11:23 AM

• billwald

  Thought experiment: say the world muddles through the current mess. India and China's middle class grows and reaches an economic/wage parity with the U.S. and the EU. How will the over all income distribution curve change? Will the current sort of normal distribution (bell curve) as in the U.S. change to the current Indian model with a small middle class and a much smaller rich class? Skewed to the low end?

  Published: March 4, 2008 11:29 AM

• mikey

  "Squeezing margins as in a vice, this development may also diminish the orders received from those closer to the shop front, since these erstwhile business customers will now be too busy scrambling to restack their emptying shelves to contemplate closing off the sales area for a refit, much less to ponder the purchase of a gimmicky new IT system, or to think of splashing out on an expensive and distinctly nonessential corporate makeover."

  I assume you meant business owners, not customers.At an rate, I wonder what the current decline in interest rates have on these
  defered plans for plant expansion.

  Published: March 4, 2008 2:49 PM

• Bruce Koerber

  Dear Sean,

  Thank you for your melodious exposure of the Keynesian fantasies and for the plump morsels of economic realities.

  Your article was pleasing to the senses because it makes sense!

  With warm regards,
  Bruce

  Published: March 4, 2008 4:44 PM

• zermat

  Sean,

  For the love of god, just learn to speak basic #$#$*%&!! english!

  Published: March 4, 2008 6:17 PM

• M E Hoffer

  for these types: zermat at March 4, 2008 6:17 PM

  I suggest: http://www.thefreedictionary.com

  http://financial-dictionary.thefreedictionary.com/

  http://encyclopedia2.thefreedictionary.com/

  and a distaste of Pablum..
  http://www.thefreedictionary.com/pablum
  

  Published: March 4, 2008 8:46 PM

• Nasikabatrachus

  Nice article...I guess...

  Could use some clearer explanations, methinks.

  Published: March 4, 2008 9:30 PM

• Robert

  For those concerned about "The Crisis Point" please join us April Fool's Day for the nationwide Federal Reserve Protest! www.jokeonamerica.com

  Published: March 4, 2008 10:09 PM

• ToeKnee

  This is a pretty disappointing article. The language is pompous, verbose, and incoherent. Sean, for which reason are you afraid to convey your ideas clearly: 1. because your ideas are really simple and must be hidden in jargon and complex sentence structure or 2. your ideas are really bad and most people would disagree with them?

  The purpose of an author is to convey information. You have done a poor job of that with this piece.

  Published: March 4, 2008 10:26 PM

• JasonR

  Pardon my lack of Austrian school understanding, but is this article meant to describe to some extent the current economic situation? If so, would someone explain how end demand will increase? I would assume with the implosion of "wealth" generated by skyrocketing home prices and equity withdrawals, actual demand is decreasing.

  Published: March 5, 2008 1:28 AM

• josh m

  I felt stupid reading that. I'm not necessarily saying that I shouldn't anyway, or that it's the author's fault.

  Published: March 5, 2008 4:54 AM

• fundamentalist

  JasonR: "would someone explain how end demand will increase?"

  Don't worry about demand. That's a Keynesian, fetish. Demand follows employment. First, people will restore lost wealth through increased savings. Then, businesses will borrow those savings to expand when business people think the timing is correct. Expanding businesses will hire more people and those workers will spend their wages on more consumer goods, thus increasing demand.

  Keynesians believe that demand is a fickle, fleeting thing; it comes and goes without explanation. When it goes, the government must step in and increase demand until fickle consumer demand returns. The truth, however, is that demand falls when people lose their jobs, as they have in the housing and mortgage industries lately. People lose their jobs because their employers made some bad decisions earlier. Large numbers of employers made bad decisions at the same time and in similar industries because the Federal Reserve kept interest rates too low for too long.

  If the government will simply do nothing, people will naturally restart the process of saving, investing, and increasing employment and demand. There's no magic to it and government intervention only hinders the natural processes.

  Published: March 5, 2008 8:10 AM

• JasonR

  fundamentalist -

  Thanks for your response. I am still confused, however, on a couple of issues.

  "The truth, however, is that demand falls when people lose their jobs, as they have in the housing and mortgage industries lately."

  Wouldn't demand also be affected by the loss of (albeit false) wealth by consumers who borrowed more than they could afford and suddenly are broke?

  Second, I am also confused by the concept that during the "easy money" times, business efforts are shifted away from the end consumer (retail) and up the goods chain (raw materials). My understanding is that this is the malinvestment.

  Is this the correct understanding of the Austrian theory? It seems it wouldn't fit with the current economy as credit was put in the hands of consumers as well as businesses. I read an article by Roger Garrison and he suggests this as an alternative Austrian theory (a shift away from "middle goods" towards both lower and higher order goods).

  Thanks again!

  -J
  

  Published: March 5, 2008 10:17 AM

• fundamentalist

  JasonR: “Wouldn't demand also be affected by the loss of (albeit false) wealth by consumers who borrowed more than they could afford and suddenly are broke?”

  Yes, it would. For example, in the sub-prime mortgage problem, some consumers borrowed more for housing than they could afford and they defaulted on their loans. But what made it possible for consumers to borrow so much? Artificially low interest rates by the Fed, and Federal laws which encouraged banks to lower their credit standards. But if consumers have jobs, they will continue to spend most of their income whether they can borrow or not. Without borrowing, consumer spending won’t increase at the same rate it did with borrowing, but it won’t collapse.

  JasonR: “Second, I am also confused by the concept that during the "easy money" times, business efforts are shifted away from the end consumer (retail) and up the goods chain (raw materials). My understanding is that this is the malinvestment.
  Is this the correct understanding of the Austrian theory? It seems it wouldn't fit with the current economy as credit was put in the hands of consumers as well as businesses. I read an article by Roger Garrison and he suggests this as an alternative Austrian theory (a shift away from "middle goods" towards both lower and higher order goods).”

  Yes, I think you have a good grasp of the Austrian Business Cycle Theory, ABCT. I think the current economy fits the ABCT in that consumer spending was directed primarily at a durable good, housing, the supply of which was enhanced by low interest rates. Housing and autos are those strange items called consumer durables. In the ABCT, they classify as higher order, capital intense, industries. Both are very sensitive to changes in interest rates. In addition, you can tell that demand for raw materials has increased dramatically by looking at the high costs of oil, gas, and most metals. These raw materials must be increasing in price because of industrial demand to use them in manufacturing processes, which indicates that businesses have made malinvestments due to low interest rates.
  

  Published: March 5, 2008 1:38 PM

• JasonR

  fundamentalist -

  Thanks again - though I wouldn't claim to have a good handle on anything! ;-)

  One last (hopefully!) question: ABCT suggests that with easy money and the move towards higher order goods, demand for consumer goods is not met, and that eventually companies that have invested in higher order goods realize their mistakes and shift their efforts towards consumer goods. However, we have said consumer demand will drop (to a certain extent) so wouldn't companies recognize this and also avoid investment in activities closer to the consumer end of the spectrum?

  This is why I brought up Garrison's theory - his twist seems to be that companies actually move to the middle.

  Where does ABCT actually fall on this (assuming there is a consensus)?

  Published: March 5, 2008 2:35 PM

• fundamentalist

  JaronR “One last (hopefully!) question: ABCT suggests that with easy money and the move towards higher order goods, demand for consumer goods is not met, and that eventually companies that have invested in higher order goods realize their mistakes and shift their efforts towards consumer goods.”

  Actually, I think it’s more accurate to say that the economy shifts from consumer to capital goods, and vice-versa, not that individual companies do it. In reality, the volume of consumer goods production changes very little. The major swings in the economy take place in the higher order, capital intensive industries. If I remember correctly, Garrison simplifies the structure of production by condensing it to just three: capital production, distribution, and consumer goods. The capital sector suffers the wide swings in production, distribution less and consumer goods the least. With artificially low interest rates, the capital sector hires more people and pays them wages. Those workers spend their wages on consumer goods, but no additional consumer goods are being produced, so higher demand and static production leads to higher prices. Higher prices mean higher profits for consumer goods producers, so they try to expand at the same time that capital goods producers are trying to expand. Capital and consumer goods producers compete for limited supplies of labor and materials, eventually driving both up.

  JasonR: “However, we have said consumer demand will drop (to a certain extent) so wouldn't companies recognize this and also avoid investment in activities closer to the consumer end of the spectrum?

  Consumer demand won’t drop until the end of the business cycle. Keynesians say that a drop in consumer spending will bring on a recession, but the truth is that the drop in consumer spending is the recession. But why do consumers quit spending? Because the capital goods producers lost out in the competition with consumer good producers for scarce resources. The demand for capital goods wasn’t as great at thought, and high prices of materials a labor killed profits, so many capital goods producers (such as home builders) went broke. When they went bust, they laid off a lot of consumers who then cut back on their spending.

  Why don’t businessmen understand all of this and respond better? Very few understand any economics, but those who think they do are Keynesian and so get it wrong. But even if businessmen understood the ABCT perfectly, they might still make mistakes because they depend on price signals and interest rates for decision making and when the Fed changes interest rates artificially, it destroys what valuable information exists in rates and prices.
  

  Published: March 5, 2008 4:34 PM

• JasonR

  That makes sense - thanks!

  Published: March 5, 2008 9:02 PM

• M E Hoffer

  funda-

  "But even if businessmen understood the ABCT perfectly, they might still make mistakes because they depend on price signals and interest rates for decision making and when the Fed changes interest rates artificially, it destroys what valuable information exists in rates and prices."

  key point~ good of you to express it..

  Published: March 6, 2008 12:45 AM

• Mike Walsh

  While I have a BA in economics it was obtained 30 years ago. Back then, I was told that a major tenet of economics was "Predict...and predict often!".

  Gold has gone up 50% in six months. I wish I still had my $700 gold but I sold it $200 dollars ago when the market paused.

  I have read articles from Phd's in Economics which have stated that the sub-prime issue is the beginning and it will feed on itself as the money supply contracts because contraray to Bernanke's wishes, he can't just roll the presses.

  And of course, there's always the gold bugs who say to equal 1980 prices we need to see $2200. Of course they forget that prices dropped rather quickly when the exchange, at the urging of the government, made silver's active months "liquidation only" which buried the Hunt Boys. Also, I know a number of jewelers who have said that they are thankful for the diamond market because gold jewelry sales are the softest in years. No one is rushing in to buy now as we don't have a wage-push inflation while people worry over their jobs. Contrary to the 1980 era, when it comes to the middle class, "There's no 'there', there" anymore.

  So the article is entitled "The Crisis Point of the Inflationary Boom".

  Are we arguing for $300 gold as you can't eat it, or $3000 gold as all currencies are worthless? Has the inflation bomb ended and the ETF people are going to experience an Oct 1987 day with sales due to margin calls and no fresh buyers? Haveing traded markets professionally for 25+ years, they eat like birds and relieve themselves like elephants.

  All opinions welcomed.

  MW
  NYC

  Published: March 6, 2008 4:20 AM

• gene berman

  fundamentalist:

  Quite apart from any other aspect of your comments, you're mistaken in identifying "consumer durables" as any other than lower-order goods. Just because a house lasts longer than a pound of butter (and, once having been bought, offers fewer "to buy or not to buy--that is the question" alternatives).

  The characteristic we consider is one of position--at the beginning or the end--of the process by which consumer goods are produced. It is entirely the mistaken conclusions of businessmen (entrepreneurs) which are at work in determining both the absolute size and the proportional significance of what will come to be recognized as "malinvestment."

  I've put "malinvestment" in quotes because it's also important to recognize that the term does not refer merely to mistakes but to a particular subset: those that are (often due to aspects of size, location, etc.) essentially inconvertible. Mistakes of all sorts, whether or not influenced by by seemingly lower future interest rates, misallocate resources--the stuff on which future states of want-satisfaction depend. But, under "normal" conditions, such mistakes are not all grouped in a specific direction--many of these are of the form of investments NOT made, resources UNCONSUMED because their prospects were not so bright as others.
  But those not made because the resources they would have required went into those lines favored by the (artificially-induced) lower interest rates absorbed the resources necessary and a portion of which (again, for reasons such as size, location, etc.) are now lost entirely to any new, reconfigured set of investment options.

  There is no doubt that erroneous interest-rate signals affect production and consumption--including mistakes--at all levels. But it is specifically at the highest levels of production that the most massive, potentially wasteful, and irreversible misallocations occur.

  At the risk of seeming tedious, let me state it another way.

  Under any conditions, mistakes of many sorts will occur--even mistakes about actual preferences on the part of individuals; no doubt, these cause specific, though isolated disappointment (and loss). But, in a market society, those operating as entrepreneurs take large risks--risks aggregated on behalf of what they perceive as the desires of all members of society but for which primarily their own assets shall be forfeit in case of mistake. However, if they've been mistaken, some of those losses will be in the form of expenditures which cannot be redeployed to other uses; society, from the macro view of socialist planners, the "commonweal," as it were, has been made poorer: it has less of what it would have wanted had it not been misguided by the apparent interest rate.

  Published: March 6, 2008 7:53 AM

• mikey

  
  For JasonR- try this link, I found it helpful.

  http://www.slideshare.net/fredypariapaza/capitalbased-macroeconomics/

  Published: March 6, 2008 10:29 AM

• fundamentalist

  gene: "...you're mistaken in identifying "consumer durables" as any other than lower-order goods."

  I'm pretty certain I follow Hayek on this in his "Pure Theory of Capital."

  Published: March 6, 2008 2:53 PM

• gene berman

  fundamentalist:

  I don't know what Hayek may have said. My appreciation for these meanings is from Mises (and Bohm). The "order" (as in higher or lower) of a good is not some function of its life or durability but rather one of its position as closer or further from the consumer, with the "higher" being those sometimes called "producers' goods.

  Published: March 6, 2008 4:52 PM

• Matt

  "The Crisis Point of the Inflationary Boom " ?

  The only inflationary boom obvious in this article is the Superego of the Author.

  More of Freud is evident than of Von Mises.
  

  Published: March 6, 2008 9:28 PM

• art poirier

  Here is how a mortgage crisis has been playing out for the last decade on a tropical American Island...

  http://www.saipantribune.com/newsstory.aspx?newsID=77748&cat=1

  Now from Sean or any other of you professional managers: Would the Baron Rothschild be buying real estate in the above market... or just gazing at the grenadine in his tequila sunrise?

  Published: March 7, 2008 7:51 AM

• evan

  Cool! inflationary recession/depression here we come. what would Soltan have done?

  Published: March 13, 2008 8:44 PM

• evan dedwydd

  I meant Solon. Guess I'll stick to radiology.

  Published: March 14, 2008 7:30 PM