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Austrian Apostate?

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I recently posted a blog on my website with the title, "Austrian Economics Would Destroy The World". Here's the link:

Soon afterwards, I received a very polite email from a long-time Macro Watch subscriber who has also read my books. He wrote (I am paraphrasing): "I know that you used to be a believer in Austrian Economics, but clearly, judging from your last blog and other things you've written, you no longer are. Have you ever considered writing an article explaining the evolution of your thinking on this matter?"

I thought that was an excellent suggestion. After all, I had placed the following quote from the great Austrian Economist, Ludwig von Mises, at the top of the first chapter of my first book, The Dollar Crisis:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

So, I have spent the last couple of days reviewing what I wrote in my three books and thinking about how and why my views have evolved since The Dollar Crisis was written in late 2002.

Here's the short answer. Back then I believed the Austrian tenet that credit creates an artificial boom and that every boom busts. To a very large extent, that was the theme of The Dollar Crisis. I wrote that a wild credit bubble was underway and that it would inevitably pop. "When? When the US property bubble pops." That happened six years later. Keep in mind, not many people were warning of an approaching crisis back in 2002.

I still believe that credit creates an artificial boom. What has changed in my thinking is that I am no longer so certain that the "final and total catastrophe of the currency system involved" is inevitable or, perhaps more precisely, I am no longer certain that it is inevitable in the near term. Moreover, by the time the crisis erupted in 2008, I was of the opinion that if the bubble were allowed to implode "naturally", i.e. without government intervention, that the catastrophe would be so great that it could literally destroy our civilization, in a kind of "Fall of Rome" type scenario. Therefore, starting from the point were the risk of utter collapse became all too real, I began advocating that the government should put in place policies that would prevent our economic system from collapsing. That recommendation was in complete opposition to the traditional Austrian stance, which is that "since the collapse is inevitable, the sooner it happens, the sooner the recovery can begin".

That remains the current orthodox Austrian policy advice: let it collapse. The people who hold that opinion are MUCH less pessimistic that I am about how long the depression would last and they are MUCH more optimistic about how quickly the post-depression recovery would begin. They believe there would be a few tough years followed by a rapid return to a proverbial laissez-faire Garden of Eden. Whereas I believe that no one alive today would live long enough to see the recovery. When Rome fell, there was a recovery - but only after 1,000 years.

Seven years after the near-miss Depression of 2008, what we see is that the government has managed to prevent the bubble (and our civilization) from collapsing - at least thus far. That accomplishment required a combination of trillions of dollars of new government debt and trillions of dollars of fiat money creation. Of the two, the fiat money creation by the central banks seems to have been the decisive factor. In the United States, $3.6 trillion of newly created money pushed up the stock market and property market so far that Household Sector Net Worth has now increased to $86 trillion - an incredible $18 trillion (26%) more than its pre-crisis peak in 2007.

In an ideal world, I would have preferred to see the government borrow and invest trillions of dollars in new industries and technologies in order to restructure the US economy and restore its long-term competitiveness. For instance, in 2008, if the government had begun a 10-year, $1 trillion (Apollo-like) mission to cure cancer, in all probability, a cure would now be only a few years away. That is what I began advocating in my second book, The Corruption of Capitalism.

But instead of investing to restructure the economy, the government has only managed to keep the economy from collapsing by creating an even bigger asset price bubble. The problem with that approach is that it is very uncertain how long the government can keep asset prices inflated.

Still, given that the alternative would most probably have been something resembling a return to the Dark Ages, I am happy they have managed to keep the global economy from collapsing, regardless of how they did it. I have enjoyed the last seven years of continued prosperity and civilization. Looking ahead, I strongly believe that everyone should work together to make sure that this credit bubble economy is never allowed to deflate. And, if it really, truly is impossible to keep the bubble inflated forever, even then, we should support the government in its efforts to keep it inflated absolutely as long as possible.

Our economic situation today may well be analogous to life itself. We all know that one day it has to end. We also all act to push that day back as far as possible. My policy advice is based on my belief that it is much better to die another day, preferably one in the distant future.

The Austrian policy prescription is to balance the government budgets, disband all the central banks and return to a gold standard. If those policies had been in place during the last 100 years, we would not be in this mess today. The global economy would be very much smaller than it is now, but there would not be a global economic bubble. Those policies weren't enforced, however. Our global bubble has been inflating since, at least, the beginning of World War II. It's way too late to enforce them now.

The day that Austrian policies are put in place would be our last.

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Original publish date: November 30, 2015

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