Cafe Hayek - Latest Comments in They Should Have Gotten the Prize (Again)

Re: They Should Have Gotten the Prize (Again)

gary lammert — Mon, 09 Oct 2006 07:07:53 -0000

Among all these notables, Ludwig von Mises was the big picture Macroeconomic's MacroEconomist.

Who really wins or loses with excessively easy lending terms

or excessively low interest rates?

In the late 1920's buying on credit became widespread. Automobiles,

radios, washing machines - all became available to the American wage

earner - on credit. And they consumed.... and consumed in bolus mass.

On the stock exchange ten percent margin was available for

speculators. Borrowing became rampant. Stock valuation become

overvalued and assets relatively over consumed. The population of

consumers in need of a radio, washing machine, automobile, et. al.,

was rapidly depleted. Ongoing consumption at the median

credit-dependent bolus rate was impossible. Inventories accumulated

and workers were laid off, with the resulting inability to pay for

their own assets acquired on credit. The assets were then repossessed

increasing the already over supply. The deflationary macroeconomic

negative feedback system proceeded in a necessary and mechanistic

fashion.

Lenders were left with repossessed assets whose worth was less than

purchase value - with a falling population of potential consumers.

With less product demand factory owners with capital debt for

machinery and buildings were unable to maintain payments. Stock on ten

percent margin became more than just worthless, it became a liability,

as obligations to pay the entire purchase amount remained even as the

stock valuation decreased by 25, then 50, then 75 percent. As the

macroeconomic system unwound into a deflationary collapse in 1932; the

debtor of last resort, a debtor whose balance sheet was quite good,

became also the employer of last resort. And so as the US GDP

collapsed by 40-45 percent, the US government began its work projects

program creating some of the public infrastructure that still serves

its citizen to this day.

Fast forward three generations. The marvels of the late 1920's were

replaced by the computer, its software, and the new information age of

the nineties. Over borrowing and over investment in this arena left

warehouses full of enough fiberopic cable for a generation and an 80

percent collapse of the NASDAQ over the exact same time frame as the

DJIA top to bottom period from 29 to 32. 'Replaying 1929' - US's, not

the United States', but Urban Survival's insightful recognition of

what was transpiring, i.e., 1858's second subfractal's Groundhog's Day

to 1929 was an instant attractor to the website for all who

qualitatively, and for fractalists, quantitatively, appreciated the

nature of cyclical events.

1932 was not 2002. The internet collapse, while wiping out more than 6

trillion dollars of paper value, had little effect on the GDP. Times

were different. A strange set of world circumstances existed in 2000.

Emerged was both a single superpower with an unparalleled military and

nuclear arsenal and a rapidly evolving, highly capable and rising

manufacturing giant with a massive population willing to work 60-80

hours a week at 1/10-1/20th the cost of the superpower's worker. Even

with oceanic transportation of goods, the American consumer reaped the

benefits of these low cost items. American industry could not compete

and jumped in, closing their own manuafacturing plants, and began

marketing and enhancing the distribution system of foreign made

goods.

At the same time the Federal Reserve and Financial Big Business

synergistically created the last 'great' American industry. This

powerful industry increased the money supply faster than at any other

time in US history. That industry could be labelled 'US Lending

Unlimited.' In the 21st century, that industry has shoehorned the

average American citizen into the role of debtor of last resort. The

citizen-wage earner has been enticed into a speculative housing asset

bubble greater in proportion and magnitude than any prior historical

bubbles.

The new lending parameters have made initial house ownership less

expensive on a monthly basis than rental. They have divorced the

value of homes from traditional savings and wages. The new rules have

artificially inflated the purchase price of homes. Wages have not

proportionally increased, leaving the interest and principle debt to

wage ratio and long term debt burden significantly higher. Equity from

that 'artificially' inflated price has been extracted in record

amounts by home owners who have gone on a consumption spending spree,

bolus consuming items in a two-three years that might otherwise have

been consumed over a decade. Home values soared eventually pricing out

the entry population. Building continued and oversupply resulted.

Now to this mix comes higher property taxes, higher insurance rates

especially in eastern and southern coastal states, and a large

population of readjusting ARM's with higher monthly payments. The

inflationary true debt burden and costs become too many straws for

the camel's back. The oversupply of washing machines and automobiles

in 1929 and fiberoptic cable in 2000 now resonates with the incipient

cateclysm in the over supplied housing market in 2006. The money made

by the builders which was no longer being invested in the housing

markets found its way into the equity market, the last game in town -

for one last blow-off. The composite Wilshire nominally is still 1100

billion or so below its March 2000 value and using housing prices as

dollar-denominated purchasing power is valued at perhaps 60 percent of

its March 2000 worth.

Meanwhile there is very little the US can exchange with its Eastern

'trading' partners except its paper currency and a promise to pay

interest on that paper. This strange symbiotic relationship has

provided 'the glut of world dollar savings' that has serviced the US

federal debt and maintained low interest rates. The US dollar, because

of America's superpower stature, continues and will continue to have

value in its purchasing ability of dollar-denominated oil. As

commodity assets, equity assets, and real estate assets deflate, the

value of the dollar will increase in its purchasing power. Friday's

breakout of the dollar is occurring as an expected coupled event with

the collapsing US housing market and incipient uS equity collapse.

So who wins when credit is so unregulated and made so easy that not to

borrow is to lose money? Who wins when real ongoing inflation creates

a disincentive to saving? As the economy collapses; and folks are

unable to repay their loans; and lenders acquire assets that cannot be

sold; and the world becomes a much more dangerous place - the answer

becomes apparent: no one.

Gary Lammert

Re: They Should Have Gotten the Prize (Again)

ettubloge — Mon, 09 Oct 2006 05:41:21 -0000

Simon's message was pure beauty as in clear, optimistic and prescient.

Re: They Should Have Gotten the Prize (Again)

Joseph — Sun, 08 Oct 2006 15:42:46 -0000

Fischer Black is always put in this category.

His recent biograpy, The Revolutionary Idea of Finance, makes for a great read.

Re: They Should Have Gotten the Prize (Again)

dearieme — Sun, 08 Oct 2006 09:12:19 -0000

When I attended some elementary economics lectures 40 years ago, the lecturer went out of his way to pour vituperation on Joan Robinson. He doubted her intellectual honesty.

Re: They Should Have Gotten the Prize (Again)

Swimmy — Sun, 08 Oct 2006 08:46:01 -0000

Don't forget that Knight essentially beat Coase to the Coase Theorem.

Re: They Should Have Gotten the Prize (Again)

Scott Wood — Sat, 07 Oct 2006 16:34:57 -0000

How about Aaron Director, who is generally cited as the founder of the law and economics movement, and lived to, what, 102?

Also, FWIW, I suspect that Mancur Olson would have won one had he not died surprisingly at a relatively young age.

Re: They Should Have Gotten the Prize (Again)

Aaron Krowne — Sat, 07 Oct 2006 07:40:43 -0000

I nominate Frederick Soddy. I have never seen a better understanding and definition of wealth.

Of course, he was actually not an economist at all, but a famous chemist, who won the Nobel prize for *that* in 1921. Five years later he wrote "Wealth, Virtual Wealth, and Debt"--unfortunately at the dawn of the Keynesian policy bonanza, and so entirely discarded by history--in which he basically warned of the Great Depression, explaining the looming problems in national economics having to do with the misunderstood nature of wealth, debt, and money.

Mises would be a good one too. But perhaps, in fact, he should be posthumously awarded the prize jointly with Soddy =)

Re: They Should Have Gotten the Prize (Again)

Jason Briggeman — Sat, 07 Oct 2006 02:49:16 -0000

Russell, one alternative model that we sometimes talk about here at Mason is Bertrand competition - firms are simply assumed to set price instead of quantity, and even with N=2 firms you can get similar features to atomistic (oh, sorry, "perfect") competition, such as P=MC.

Re: They Should Have Gotten the Prize (Again)

chris — Sat, 07 Oct 2006 01:56:54 -0000

How about Michal Kalecki? He anticipated much of what Keynes said in the General Theory, with more clarity and more attention to statistics. Or Piero Sraffa?

Re: They Should Have Gotten the Prize (Again)

Russell Nelson — Fri, 06 Oct 2006 23:40:21 -0000

Oh, and speaking of "perfect competition", I would REALLY REALLY like to see that theory put back on the shelf. Not because it's not useful for certain very technical constructs, but instead because the main thing that students get out of an economics course in which it is taught is "Markets only work when competition is perfect; in all other instances you need governments to intervene to save markets from themselves." I've seen WAY too many people tell me this, and the only possible source of it is the theory of perfect competition. Just Don't Teach It.

Re: They Should Have Gotten the Prize (Again)

Russell Nelson — Fri, 06 Oct 2006 23:37:24 -0000

Definitely Julian Simon and Ludwig von Mises.

Re: They Should Have Gotten the Prize (Again)

Lars Smith — Fri, 06 Oct 2006 22:07:18 -0000

Albert Hirschman is alive and deserves the prize.

http://en.wikipedia.org/wik...