The Winter 2011 issue of the Quarterly Journal of Austrian Economics is now available online. This issue, vol. 14, no. 4, includes:

Fiat Money and Collective Corruption
Thorsten Polleit

Open Institutional Structure
Feng Deng

Hoover and Wages in the Depression: A Comment on Douglas MacKenzie
Daniel Kuehn

Hoover and Wages in the Depression: A Comment on Douglas MacKenzie: A Rejoinder
Richard Vedder and Lowell Gallaway

Knut Wicksell’s Tribute to Menger
Per Bylund

Book Review: Lire Bastiat: Science Sociale et Liberalisme, by Robert Leroux
Jorg Guido Hulsmann

Book Review: Keynes Hayek: The Clash that Defined Modern Economics, by Nicholas Wapshott
John P. Cochran

The mission of the QJAE, as it was when it was adopted from Murray Rothbard, is “to promote the development and extension of Austrian economics and to promote the analysis of contemporary issues in the mainstream of economics from an Austrian perspective.”

Submissions to the QJAE may be sent to qjae@mises.org. Submission criteria are here.

Last week I attended a workshop at the ECB on Global Liquidity. Global Liquidity of course refers to money flowing throughout the world as a result of western central bank money printing—especially Fed printing. I thought it might be beneficial to highlight some insights gained.

1. Attended mostly by central bankers, the group of 40-50 people seemed to be in agreement that their—and particularly the Fed’s—monetary policy is a key driver of financial asset prices, including commodities and real estate.

I learned that while there is no consensus among central bankers that increased bank credit is the sole driver of higher asset prices (though I’m told many say that it is, and one economist I spoke with said that it was), there is a consensus that it is the sole driver of inflation in the long run. The short-run drivers are rather insignificant. One that I agree with is changes in the supply of imports. As a booklet I bought states: “Inflation is ultimately a monetary phenomenon.”

Why central bankers agree that rising consumer prices are ultimately a monetary phenomenon, but believe rising asset prices are only a partial monetary phenomenon is beyond me.

Just to be clear, I asked one central banker about the theory that unions can drive up prices. He said that they could—if there was an increase in money. He was spot on.

An very interesting insight came about when he said that I sounded like a monetarist. I said that I was actually more aligned with Austrians. He immediately replied that the school is not much different than monetarists with respect to what we had been discussing. Of course he was right, but it impressed me that he was that intimately familiar with Austrian views. After all, one Italian central banker I spoke with a few years ago asked: “what is an Austrian?”

2. The group also discussed that monetary policy has both a supporting and a destabilizing effect on the economy and financial system (we, of course would argue that it is the sole driver of asset prices and of GDP and consumption in the long run). One PPT presentation by an economist from the Bank for International Settlements, regarding the financial crises concluded: “Who to blame? Model says the Fed.” I agree with him. But it’s shocking that they actually state/admit this.

Another statement was “the central bank can create distortions.” Again, to us they are—absent acts of nature—the only ones creating distortions, but that they accept their influence as matter of fact is surprising to say the least.

3. The group kept commenting that it was increased credit driving leverage. They agree that it is leverage driving asset prices. As one person said “increased leverage has to come from somewhere” (i.e., you cannot create new leverage without creating more money/credit). (They defined leverage as total bank assets over bank equity and as equity of banks times leverage). Interestingly, several people discussed that the leverage of banks is inversely related to the VIX.

4. There is a whole area of research related to the following information that I too have previously learned the importance of: the transmission channel of money flow into consumer prices (i.e., bank loans) is a completely different transmission channel of money flow into asset prices. For asset prices, money flow is originated in the interbank market (money market) with the large banks and hits the hedge funds/brokerage houses/institutional investors in the form of “non-monetary bank liabilities such as money market papers, certificates of deposit, commercial papers, structured notes, or bonds, which [are bank credit but] not recognized as the common medium of exchange.”

As part of this, there is a large debate about which side of bank balance sheets are responsible for rising prices: the asset or liability side. This is known as the money view vs. the credit view. The money view is the liabilities view that argues that the creation of money in the form of bank deposits pushes prices higher. The credit view is the asset view (or loanable funds theory) that argues that the creation of credit in the form of bank loans is responsible for rising prices. They noted that credit has grown much more rapidly than money over the last 25 years.

This explains why both GDP growth and consumer prices have had low growth rates while asset prices of boomed (asset inflation has been high). It also explains why performance of the financial market is unrelated to the performance of the real economy (money can flow into asset prices without flowing very much into consumer prices, causing GDP to stay low).

5. Though there was some debate on this, it was said several times that “the U.S. is the global provider of liquidity.” I thought that Europe and parts of Asia were also providers, by way of coordinated monetary policy. But somehow the US is supposed to be the driver. Perhaps they simply mean that the Fed initiates policy first, and that other central banks follow in the footsteps of the Fed unofficially so as to keep their currencies aligned. By intentionally keeping their currencies at parity, they suck in capital flows pushing their asset prices higher. Thus, US liquidity evolves into global liquidity.

6. One paper argued that Europe is as large of a driver of US asset prices, but it’s not registered on the radar screen as such because the Eurodollars they use are held in the names of US banks, and thus show up as US assets. If this is the case, European banks affect our asset prices much more than previously expected.

7. I was surprised at how their language was so similar to that of Austrians, since mainstream economists usually cloak their points with obscure, “roundabout” language. These monetary economists spoke regularly of the central bank creating money, and kept noting that it was only possible in a fractional reserve system. They even used the term “Ex nihilo” as Austrians do. They also spoke of misallocation of capital, distortions, and booms and busts. Interestingly, one paper presented distinguished between “aggregate demand” and “aggregate real demand” differentiating between aggregate demand caused by money printing and true aggregate demand in the real economy (which, of course, can rise only with more production).

8. Though they know that they are aware causing rising prices, boom and bust asset movements, and financial crises, they still support fractional reserve banking and credit creation. They really, truly believe that economies need new credit in order to grow. That, is their originating flaw.

The main takeaway is that it is very surprising how aligned with Austrians these monetary economists are. I think this is so because these people focus in such a detailed fashion on money and prices that they cannot avoid the real facts. Within the scope of their daily work, they are not political propagandists; they are merely seeking—as are Austrians—to understand how things really work. It’s just too bad they don’t advocate different policy actions based on their conclusions.

Oh how the mighty tall have fallen. And they are still building despite falling rental rates in Dubai. Elsewhere India and China are building national record setting skyscrapers sending a crisis signal for these two “developing” giants.

ht: JP

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‎”I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces.” -Étienne de La Boétie

According to Bloomberg, banks are beginning to push short sales consistently for the first time since foreclosures began to pile up back in 2008. Prices really began to fall before the financial crisis, as early as mid-2007 in some places, but banks have long placed numerous obstacles in the way of homeowners who tried to sell their homes for what they were actually worth in the marketplace. Those of us who have worked with real estate agents who do short sales have heard nothing but complaints for years about how banks will stall and prevent short sales in a variety of ways. The result is that the property then goes into foreclosure and ends up selling for far, far less as an REO property post-foreclosure.

Why would banks do this? Well, banks have for years just assumed that home prices would turn around “any day now.” Their army of PhD economists, who ran their little computer models to tell them what would happen, told them to just avoid facing the reality of home prices for just a little while longer, and then everything would be OK. After nothing but declines since 2008, some banks are coming to terms with reality.

The article mentions CoreLogic’s home price index as ongoing proof of price declines, and we could also point to Case-Shiller in which the composite index has declined year over year fro the past 14 months or so, ever since the tax credit ended. In other words, government meddling did nothing but postpone the inevitable.

The New York Times reports on vacant malls across the American landscape. Thanks to declining retailers:

The result is near-record vacancy rates at malls of all kinds, both the big enclosed ones and the sprawling strips. Sears Holdings is closing up to 120 stores, Gap Inc. 200 stores and Talbots 110. Abercrombie & Fitch closed 50 stores last year, Hot Topic, almost the same number. Chains that have filed for bankruptcy in recent years, like Blockbuster, Anchor Blue, Circuit City and Borders, have left hundreds of stores lying vacant in malls across the country.

The political side of this is that these malls were cash cows for state and local governments and now that revenue is drying up. It’s not just that people are buying less stuff, it’s also that a lot of it has moved online, so the stakes are very high for governments seeking to tax internet sales.

Meanwhile, while single-family and retail real estate remains in the dumper, multifamily loan originations spiked 64% in 2011. The multifamily industry is just making up for lost time after almost a decade of misallocation of resources toward single-family mortgages in response to Fannie, Freddie and the Fed pushing homeownership like there’s no tomorrow. Multifamily production and demand suffered from about 2003 through 2009, thanks to government and GSE edicts on mortgages.

Eugen von Böhm-Bawerk was an economist, lawyer, finance minister, teacher, and a founding figure of the Austrian School of economics. Born in 1851 in the city of Brno in the Austro-Hungarian Empire, Böhm-Bawerk was initially trained as a lawyer at the University of Vienna. During his education, he first read Menger’s Principles of Economics and it immediately transformed him into an economist. Although he never studied economics under Menger directly, he quickly became an adherent of his work.

FULL ARTICLE by Mattheus von Guttenberg

A governmental easy-money policy has many repercussions. Currency debasement, the enabling of unnecessary wars, and increases in the size of federal power are among them. And political interference into monetary affairs always leads to economic distortions.

These distortions in turn lead to government imposition of rules, regulations, taxation, and tariffs, all of which favor a handful of powerful and influential corporations to the detriment of small- and medium-sized businesses.

And easy money leads to the impoverishment of the middle and lower classes and an increase in government dependence. How can anyone who has come to depend on his government for his livelihood feel empowered to demand that the same government allow him the freedom that he thinks he deserves?

FULL ARTICLE by Carmen Alexe