MisesWiki talk:Call to Action/Austrian predictions

From Mises Wiki, the global repository of classical-liberal thought
Jump to: navigation, search

I guess the predictions contained in the introductions to America's Great Depression don't count? E.g. "We can look forward, therefore, not precisely to a 1929-type depression, but to an inflationary depression of massive proportions." Nathan Larson (talk) 15:45, 9 August 2012 (MSD)

Wow, missed out on that one. It would be cool to have Rothbard on the list as well! How specific are they - i.e. do they go into details as to what will happen or around what time period? Pestergaines (talk) 11:02, 10 August 2012 (MSD)
Here is Rothbard's quote:
But if Reaganomics is doomed to be a fiasco, what is likely to happen? Will we suffer a replay, as many voices are increasingly predicting, of the Great Depression of the 1930s? Certainly there are many ominous signs and parallels. The fact that Reaganomics cannot bring down interest rates for long puts a permanent brake on the stock market, which has been in chronic trouble since the mid-1960s and is increasingly in shaky shape. The bond market is already on the way to collapse. The housing market has at last been stopped short by the high mortgage rates, and the same has happened to many collectibles. Unemployment is chronically higher each decade, and is now at the highest since the Great Depression, with no sign of improvement. The accelerating inflationary boom of the three decades since the end of World War II has loaded the economy with unsound investments and with an oppressive mountain of debt: consumer, homeowner, business, and international. In recent decades, business has in effect relied on inflation to liquidate the debt, but if "disinflation" (the lessening of inflation in 1981 and at least the first half of 1982) is to continue, what will happen to the debt? Increasingly, the answer will be bankruptcies, and deeper depression. The bankruptcy rate is already the highest since the Great Depression of the 1930s. Thrift institutions caught between high interest rates to their depositors and low rates earned on long-time mortgages, will increasingly become bankrupt or be forced into quasi-bankrupt mergers with other thrifts which will be dragged down by the new burdens. Even commercial banks, protected by the safety blanket of the FDIC for half a century, are now beginning to go down the drain, dragged down by their unsound loans of the past decade.

Matters are even worse on the international front. During the great credit boom, U.S. banks have recklessly loaned inflated dollars to unsound and highly risky governments and institutions abroad, especially in the Communist governments and the Third World. The Depository Control Act of 1980, which shows no signs of being repealed by the Reagan administration, allows the Federal Reserve to purchase unlimited amounts of foreign currency (or any other assets) or to lower bank reserve requirements to zero. In other words, it sets the stage for unlimited monetary and credit inflation by the Fed. The bailing out of the Polish government, and the refusal by the U.S. to declare it bankrupt so that the U.S. taxpayer (or holder of dollars) can pick up the tab indefinitely, is an omen for the future. For only massive inflation will eventually be able to bail out foreign debtors and U.S. creditor banks.

Since Friedmanite gradualism will not permit a sharp enough recession to clear out the debt, this means that the American economy will be increasingly faced with two alternatives: either a massive deflationary 1929-type depression to clear out the debt, or a massive inflationary bailout by the Federal Reserve. Hard money rhetoric or no rhetoric, the timidity and confusion of Reaganomics make very clear what its choice will be: massive inflation of money and credit, and hence the resumption of double-digit and perhaps higher inflation, which will drive interest rates even higher and prevent recovery. A Democratic administration may be expected to inflate with even more enthusiasm. We can look forward, therefore, not precisely to a 1929-type depression, but to an inflationary depression of massive proportions. Until then, the Austrian program of hard money, the gold standard, abolition of the Fed, and laissez-faire, will have been rejected by everyone: economists, politicians, and the public, as too harsh and Draconian. But Austrian policies are comfortable and moderate compared to the economic hell of permanent inflation, stagnation, high unemployment, and inflationary depression that Keynesians and Friedmanite neo-Keynesians have gotten us into. Perhaps, this present and future economic holocaust will cause the American public to turn away from failed nostrums and toward the analysis and policy conclusions of the Austrian School.

MURRAY N. ROTHBARD Stanford, California September 1982

Nathan Larson (talk) 20:57, 10 August 2012 (MSD)

Well I'll be damned! The massive inflation can be argumented away as too general (didn't appear to happen, and that's what the Austrians always predict anyway), but there is a rather distinct prediction of the Savings and loan crisis! Cool stuff! Pestergaines (talk) 03:18, 12 August 2012 (MSD)
And added. If only there was more... Pestergaines (talk) 14:04, 12 August 2012 (MSD)

Rothbard's predictions from 1982

Back on topic at last. Rothbard says:

The only way out of the current mess is to "slam on the brakes," to stop the monetary inflation in its tracks. Then, the inevitable recession will be sharp but short and swift, and the free market, allowed its head, will return to a sound recovery in a remarkably brief time. Only a drastic and credible slamming of the brakes can truly reverse the inflationary expectations of the American public.

That seems to me very crucial for reasons I'll elaborate on further. But right after that he continues:

But wisely the public no longer trusts the Fed or the federal government. For a slamming on of the brakes to be truly credible, there must be a radical surgery on American monetary institutions, a surgery similar in scope to the German creation of the rentenmark which finally ended the runaway inflation of 1923. One important move would be to denationalize the fiat dollar by returning it to be worth a unit of weight of gold. A corollary policy would prohibit the Federal Reserve from lowering reserve requirements or from purchasing any assets ever again; better yet, the Federal Reserve System should be abolished, and government at last totally separated from the supply of money.
In any event, there is no sign of any such policy on the horizon. After a brief flirtation with gold, the Presidentially appointed U.S. Gold Commission, packed with pro-fiat money Friedmanites abetted by Keynesians, predictably rejected gold by an overwhelming margin. Reaganomics—a blend of monetarism and fiscal Keynesianism swathed in classical liberal and supply-side rhetoric—is in no way going to solve the problem of inflationary depression or of the business cycle.

Looking on inflation of that period, (see image and in numbers) we see inflation, as measured by the CPI, actually tapering off by 1981 and going down significantly by late 1982. Taking into account how unreliable and problematic CPI numbers are, it would seem that the "slam on the brakes" was actually performed by someone (Paul Volcker) and it may have actually worked in the end! So it looks like Rothbard missed this development and misjudged the public's reaction to the "remarkably high interest rates". ("The twin hallmarks of "Reaganomics" so far have been huge deficits and remarkably high interest rates.")

However, WP says (confirmed by BLS) that unemployment reached its peak in December 1982 and that's when the recovery started, culminating around 1984 - which Rothbard wouldn't see at the time of writing.

It seems then that Rothbard missed the part about the massive inflation. The consequences has been still serious, however (Black Monday (1987), the slowly collapsing S&Ls, both followed by the 'Early 1990s recession').

Did Rothbard address this episode in some of his later writings? Or did anyone else write about this and analyzed the prediction? Pestergaines (talk) 00:05, 26 November 2012 (MSK)