Question on Austrian Economics and Inflation

Discussion in 'Economics' started by Daal, Nov 18, 2005.

  1. Daal


    Since inflation, according to them, is mainly a money supply issue, I assume that rising prices on booms and bubbles are beneficial(Higher profit margins by companies, higher wages, more benefits, etc). Then how come Greenspan uses a policy of raising interest rates when the economy is growing fast, even he belives inflation is a "monetary phenomenon", unless prices are rising more than wages then it he shounld be slowing the grow, we can have 20% inflation a year and it wounld be a bad thing as a long standard of living is growing by 21%. I'm pretty sure he believe those things since he was a fiercy advocator of laisse-faire, mises, rand etc. No guts to face an ignorant congress and society?
  2. cable


    He *WAS* a great advocate of Rand, but he crumbled the minute he got power. He's now viewed by Austrians as the Judas Iscariot of responsible economics; he's become the very thing he once hated. Be sure to check out the Ludwig von Mises Institute, all the answers are in there, in the form of many, many free downloads of superb quality and breadth. Highly recommended.
  3. TGregg


    Just as one example, when he was a Randian, he supported going back to the gold standard. Once Uncle Sam started signing his paychecks, he reversed that stance.
  4. Daal


    I doubt he changed his views, more likely he knows its almost impossible to go back to gold standard and apply austrian principles since the whole world and most economics will think he lost it. I believe he is trying minimize the impact tradional economics have on the economy by being the fed chief. I've heard he still keeps contact with Nathaniel Branden and he said greenspan is doing a good job(and he is a libertarian and objectivist)
  5. The gold standard is being reserved for a collapse of the international banking system. Until then, there is no need for it. Once all else fails, it can be reinstated to restore stability and restore the US as the world's reserve currency. And it may not be the gold standard, but something else. Particularly if fuel cells become the thing of the future.

    Just hope the chinese don't do it first.
    (almost hate posting that too.)
  6. cable


    So about five years then?

    Just kidding... I hope :D
  7. I don't think he would care if inflation was growing consistently at 20%. It wouldn't be a problem for anyone in the economy to accomodate such a situation. The problem with high inflation is that it is inherently volatile, and unpredictable and volatile inflation can lead to serious problems in the "real goods" economy. People won't enter into long term contracts and won't make necessary investments to continue growing the economy when they can't sign long term agreements. (Imagine a guy thinking he was getting paid 30000 real dollars per year but ends up getting paid 300 real dollars per year.) There is also some worry that if inflation gets too high, people will start substituting real goods for money. This is seen as bad because it adds layers of complexity, and a lack of transparency onto an already confusing economic situation. (Try calculating the GDP in sandwiches or cars.) So, high inflation isn't necessarily bad by itself, but unpredictable inflation is.
    That being said. I know there has been some questions recently about what constitutes good inflation versus bad inflation. A strong argument has been made that interest rate adjustments in the short term can lead to an economy being unable to resume the previous growth path that it was initially on. Not that it can't return to a similar growth level, but that the growth path it resumes won't be identical, or even significantly similar.
  8. no. Austrians see inflation as mainly a money supply issue. this is true.

    however, They don't see boom and bubbles as beneficial. In fact , they see booms and bubbles as being directly caused by interest rate manipulations. Keynesian monetary policy is , according to them, the direct cause of our cycle from booms, to bubbles and to recessions. These business cycles are an effect of "smoke and mirrors" growth, which perpetuates malinvestment. This malinvestment is then corrected once the fed raises interests rates, effectively ending the flow of "free money" into the economy. THen We enter into a recesion once the correction happens.

    If the housing bubble bursts and there is a recession following it, The austrians might have a notch on thier belts to brag about.
  9. interest rates are rising to control [perceived] inflation at the currency exchange level.

    higher interest rates = more demand for dollars = stable exchange rate = no perceived inflation

    inflation is inflation
    low cpi = low [perceived] inflation
    stable exchange rates = low [perceived] inflation
    higher asset prices = [good] inflation
    higher energy prices = [evil oil company] inflation

    it's a game of directed and concious manipulation of public perception.

    imagine playing monopoly while one player secretely adds money to the game. you really think the value of each dollar remains constant? now imagine a more complex game of monopoly where that player could influence where those dollars show up (in full circulation, stuck in houses, parked in bonds, etc.) inflation is inflation. just because you don't see an out of control CPI # or the dollar falling against other currencies doesn't mean inflation doesn't exist.

    you've been sold a load of bs.

    why do people believe so adamantly in the law of supply/demand as it applies to everything tradeable but suspend those rules when it applies to dollars? if you have 1 orange in the market place it's likely going to be pretty valuable. but if you have 1,000,000 oranges, the value of each orange is going to be lower.

    but when those same rules are applied to dollars people become so confused. the gullability of people is amazing.
  10. 20% inflation is "ok"?

    so let's say your employee is paid 30k/year and comes to you at the end of the year and says he can only buy 24k worth of stuff. he wants a raise.

    how much do you give him? do you take his word for it that it's 20%? maybe we should use the cpi? but the cpi only shows 8% (after extracting food and energy, owner's equivalent rent, hedonically adjusted computers, etc.). so let's say you'd gve him an 8% raise.

    but then how often do you give him a raise? once a month? once a year? indexed to the rate of inflation over time? but is it really your job as an employer to monitor the rate of inflation? and what about the "bad" employers?

    so maybe we need a new govt department to monitor all this with an enforcement arm to ensure the "bad" employers give raises.

    but anyway, the employee sees the 20% decline in purchasing power, compares that to his 8% raise and realizes something is amiss. where'd that purchasing power go?

    inflation is NOT normal, not "OK". it is conscious THEFT. but as long as it's hidden and small enough... noone will ever notice
    #10     Nov 21, 2005