My latest article for City A.M.
I’M A big fan of the Bank of England museum. I find the way it attempts to educate children about how monetary policy is conducted to be charming. There is an exhibit with a tube of clear plastic containing a ball. The tube is “balanced” when the ball is level with a marker for 2 per cent inflation, and there is a lever labelled “interest rate”. As you pull down on the lever, the tube rotates and the ball shoots over 2 per cent. If you pull up, the tube moves in the opposite direction. Just as you grasp the mechanistic relationship between the target and the tool, “economic shocks” are added to send the tube into constant motion.
When we updated MA (our Austrian school measure of the money supply) for August, we expected to see signs of the market turbulence that has characterised recent events. Although still in a monetary contraction, MA is falling at a lower rate than previous months. It has been indicating a tightening of credit conditions for several years now, but has not significantly deteriorated.
Those of you who work in London may have noticed the new “Forum” section of City AM, the free daily newspaper. Cobden Center Advisory Board Member Jamie Whyte has a regular column, and I am delighted to be writing one myself. Focusing on macroeconomic theory and policy, it appears every Tuesday in the print edition, and this week’s focuses on unemployment figures.
Obama’s jobs plan assumes that any job is better than no job – that the goal of public policy should be to employ idle resources. But resources are never idle. Regardless of whether they are in use, they are performing an important economic function, and it is costly to put them to the wrong use. The challenge isn’t to create more jobs, but to create the right type.
We live in a world of social media, so please keep an eye on the Forum and make sure you comment on, like and retweet articles you wish to promote. The climate of opinion is moving towards Austrian economics – help us turn a rumble into a roar.
The Cobden Centre’s Jamie Whyte appeared on BBC Radio 4 yesterday morning to discuss the prospect of further quantitative easing in the US and UK.
In my view, three key points came across:
- the economic situation was different in 2008 (only a serious monetary crisis can justify monetary stabilisation);
- central bank interventions get in the way of market discovery processes;
- previously injected money has been hoarded, so it hasn’t had the desired effects on broad money (central bankers are “pushing on the end of a piece of string”)
If you weren’t up at 6:20 to hear the original broadcast, you can catch it on iPlayer until next Thursday, 11 August, at 9:02 AM.
Last month I reported on a revised version of MA – an “Austrian” measure of the money supply – which suggested that the UK economy is undergoing a monetary contraction. As part of that project we are updating the measure on a monthly basis, and can report that in June 2011 MA continued to contract, but at the slightly lower rate of -5.1%.
Most economists accept that narrow money does not tell us much about the economy, but MA suggests that broad money is actually underestimating the scale of the problem.
I have recently updated an “Austrian” measure of the UK money supply labelled MA. The Executive Summary is as follows:
The 2008/09 financial crisis and subsequent recession has created renewed attention to UK monetary aggregates. This discussion paper argues that although measures of the money supply are crucial to understanding the economy, existing approaches are flawed: “Notes and Coin” is too narrow, and M4 is too broad. An alternative measure that is based on the Austrian school approach to the definition of money (MA) is proposed, which indicates the following:
- From January 2008 – January 2009 MA fell from a monthly growth rate of 27.9% to one of – 3.9%
- In the 30 months from December 2008 – May 2011 MA grew in 6 of them but contracted in 24
This finds evidence to support the conventional wisdom that a sustained and increasing monetary expansion during the “great moderation” was followed in 2008 by a catastrophic slowdown in money creation that has become a sustained monetary contraction.
The paper can be viewed here and the data is available to view via Kaleidic Economics. Kaleidic is a business roundtable that will be launching soon.
Note that in May 2011 MA fell by -5.9% (compared to the previous year), meaning that it has been contracting since October last year. The monetary deflation that has followed the financial crisis shows no signs of abating.
As one of the few Austrian economists in the UK, I’ve become somewhat frustrated by the lack of attention to knowledge processes when talking about the UK experience of the financial crisis. This isn’t to say that perverse incentives weren’t important, but that in many cases they provide an alternative hypothesis to knowledge problems. And it’s a distinctly Austrian approach to illuminate the latter. See this working paper for more; comments and feedback most welcome.
This paper seeks to provide a distinctly Austrian interpretation of the financial crisis and subsequent recession that affected the UK economy in 2007-2010. In doing so it challenges the conventional wisdom that focuses on poorly aligned incentives, providing a theoretical and empirical claim for the primacy of ignorance explanations. Particular emphasis is given to the role of regime uncertainty and so-called “big players”, as well as how faulty behavioural foundations and “price naivety” misunderstand economic calculation and recalculation. Far from being an example of “market failure”, the financial crisis has revealed that almost a century on from the socialist calculation debate many economists still fail to understand the basic principles of a market economy.
Read the article here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1861540
George Selgin is well known for having conducted detailed empirical work on the history and emergence of free banking. Most of his contributions have been in demonstrating the viability and ubiquity of fractionally reserved “free banks”, but in a recent blog post he is making another claim:
every significant 100-percent bank known to history was a government-sponsored enterprise, which depended for its existence on some combination of direct government subsidies, compulsory patronage, or laws suppressing rival (fractional reserve) institutions
Well worth a read.
Consider this diagram showing the billions of euros that each of 8 EU countries owes the other.
Whilst the numbers are far from perfect, they give a clear understanding of the extent to which EU debt obligations are interlinked. But why try to raise money to pay someone off if they owe you even more? Why not cross cancel the debts and be left with the difference?
To see how this might work I recently ran a classroom simulation where students did precisely that. After three trading rounds they had managed to generate the following results:
- The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
- Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
- Three countries – Ireland, Italy, and Germany – can reduce their obligations such that they owe more than €1bn to only 2 other countries
- Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
- France can virtually eliminate its debt – reducing it to just 0.06% of GDP
The final picture demonstrates the scope for cross cancellation. It is hard to see how such a policy would be possible, let alone desirable, but as a pedagogical exercise I think it is worth consideration. For those interested in more details I have set up a website: http://www.eudebtwriteoff.com. You can also download the full report: The Great EU Debt Write Off (.pdf)
Three of the world’s leading centres of liberty – the Foundation for Economic Education, Liberty Fund and the Universidad Francisco Marroquin, have joined forces to make available the Complete Henry Hazlitt Archive. This is over 17,000 documents including articles, personal correspondance, and subject files. Although a journalist, Hazlitt made important contributions to our understanding of economics, with some particularly effective responses to Keynesian economics. He’s a constant reminder that readibility does not imply simplicity, and that good economic ideas can be communicated to the masses. I, for one, am looking forward to mining this new resource.