I’m one of the unfortunate individuals infected with what Noah Smith in his recent Bloomberg column identifies as a brain worm similar to the one from Star Trek Wrath of Khan movie. It causes me to follow the “demented cause” of Austrian economics. Since my worm is obviously very deeply rooted in what little is left of my poor gray matter, I’m not one of those “couple” who were enlightened by Mr. Smith’s text, but rather my worm has instructed me to react against the reason and logic presented by Mr. Smith. The following text is thus a result of this worm’s instructions and I can’t take any responsibility for what is written below.

Mr. Smith claims Austrians try to change meaning of the word inflation from “increase in price levels” to “increase in money supply” in order to win the argument. In fact what Mr. Smith ignores is this thing called history, which he could search for on this other thing called the Internet. If he did, he would find out, that in 1913, the year when FED has been established, inflation in Webster’s Dictionary was indeed defined as increase in money supply. If you search for the same term now, you will find definition which Mr. Smith and contemporary mainstream economics use today, i.e. increase in price level.

This might seem trivial to many, but in fact it has important implications demonstrated by Mr. Smith himself. For Austrians, the very increase in money supply unless driven by market demand (like demand for mining more gold) is a problem since it necessarily has to increase prices as there is more money trying to buy the same amount of goods. Further study of that phenomena reveals other distortions such as malinvestments, business cycle and growth of government. When we establish that inflation in its former sense is a problem, we understand that changing its definition is a problem as well. As Mises wrote it is very difficult to fight a policy which you cannot name. Now you have to fight a completely different phenomena and explain what its root cause is and that’s where more disagreements are introduced, giving more flexibility to policymakers to shift the argument in their favor.

But even giving in to contemporary definition of inflation as increase in price level, we actually can see increase in many prices, just not those that Mr. Smith, Bloomberg and mainstream media who prefer flashy large-font numbers are looking at. Starting with government statistics, headline CPI already stands at 2.1%, just slightly above (completely arbitrary) 2% target. Billion Prices Project index which Mr. Smith refers to adds about .5% on top of that, but in the last few years, it was often more than 1% higher than official BLS number. Why should that be good or “low” when general public spends weekends shopping for price deflation and entrepreneurs constantly strive to deliver more for less is beyond scope of this debate, but it is admittedly much lower than what Austrians have expected to be seen by now. Mr. Smith can comfortably criticize such false predictions only because what Austrians failed to assume was the level of foolishness of other central banks joining the currency wars and fighting for the bottom. FED managed to export good part of the inflation to other central banks and international trade settlement (only USD-based oil trade amounts to almost half of US GDP). The question remains, what happens when those dollars will start floating back once the world officially or effectively removes the status of USD as world reserve currency.

Furthermore Mr. Smith and the rest of mainstream economics community and media completely disregard asset prices as part of price inflation indicator and always look at their increase as a good thing. After all, rising equity prices make people who hold them feel richer and rising home prices allow their owners to take a loan against them. But as price of beef is defined and compared by its weight, price of share is compared to its yield and earnings of the company it represents. And currently shares in S&P are actually overpriced by 25%, more than 50% or even 100% (based on which indicator you prefer) compared to historic means. Increase of price of a house also doesn’t make that house larger, more comfortable or better equipped. It might make its owner feel better, it might even allow him to borrow more money, but it also means it makes it less affordable for the next person in line. Ultimately this wealth effect lasts only for as long as those who own those assets don’t try to liquidate them. When they do, the bubble bursts.

Next argument in line of Mr. Smith’s attack is price of gold. Gold is indeed some 30% below the peak of bubble fueled by fear of runaway inflation caused by FED’s reaction to ’08 crisis. But even after the pullback, gold is still some 100% higher since FED started rapidly lowering interest rates in 2007. Compare that to S&P, which is 25% higher since it has been massively supported by FED only at the expense of being overpriced by any historic measure.

Towards the end, Mr. Smith becomes laughably desperate. His argument, that “monetarists such as Milton Friedman — who strongly supported printing money to fight depressions, and had harsh things to say about the Austrians — were also strongly pro-free-market” is a recurring meme amongst monetarists. I personally fail to understand the logic, which makes it very difficult for me to react. Does it mean, that since one generally free-market guy happens to agree with Mr. Smith, other free-market guys who disagree should just shut up? What also Mr. Smith discreetly ignores is the fact, that Milton Friedman himself changed his mind by mid-80’s and came out saying, that governments cannot be trusted with money, which should be left to the free market. He essentially adopted Austrian concept of free banking, which explained why gold standard is unsatisfactory solution because it still leaves gold exchange regime in hands of the state.

What is just utterly disgusting is Mr. Smith’s attempt to link Austrian economics with antisemitism using Youtube cartoon with 840 views (Update: Mr. Smith pointed out the original version of the video, which has 1.5M views. I still fail to see any connection with Austrian school of thoughts). He claims, that “Austrianism carries great appeal for the more unsavory corners of American politics“, but fails to identify them. For all I know, most (not only) American politicians are either dumber than Mr. Smith, which completely diminishes their ability to comprehend Austrian economics and philosophy or they are smart enough only to understand it goes against their power and very existence of their jobs. Those few exceptions like Justin Amash or Ron Paul could be considered unsavory only in the eyes of someone who resorts to rumors, ignores history, can’t use Google and is loaded with agenda of his own. Someone like Mr. Smith.

But that’s just the worm talking.

Author is a founder of Coin Of Sale
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Tomas Forgac

Voluntaryist/Anarcho-capitalist, self-educated Austrian economist, Bitcoiner. Freedom-, travelling-, snow-, chocolate-, wife-lover

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1 Comment
  1. Profile photo of Dave Burns

    Dave Burns July 15, 2014 , 8:17 am

    “If you search for the same term [inflation] now, you will find definition which Mr. Smith and contemporary mainstream economics use today, i.e. increase in price level.”

    It’s even worse than you think. Someone has gone and changed the definition in Mises’ Theory of Money and Credit!
    “In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.”

Thoughts? Comments?