The Man Who Predicted the Depression

[R.A. Hettinga]

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Not sure when I last saw an actual testament to Ludwig von Mises on
the WSJ
editorial page. Besides in a Ron Paul editorial, that is. :-)


Mises' "calculation argument", reasoning from the same he used logic
below,
predicted the eventual fall of the Soviet Union, and the collapse of the
Maoists, at least, in China.

"Prices aren't just made up," as Walter Williams likes to say.

While von Mises is right, there seems to be a huge parasitic load that a
state can inflict on its markets before they fail catastrophically,
causing
many, if not most, people to mistake the parasite for its host.

At the moment, markets are well on the way to becoming mere
mitochondria in
the continuing imposition of a totalizing liberty-eating superorganism.

This is primarily the effect of force monopoly, of course. If
competitive
markets for force in the same geographical area were possible (meaning
cheaper than otherwise), the problems Mises talks about would cease
immediately, and finance, and everybody else, would be finally free of
the
nation-state its price-calculating apparatchiks, among other evils.

Unfortunately, saying that reminds me more of the old Scots-Irish joke
"If
we had some ham, we could have some ham and eggs, if we had some eggs,"
than anything about its historical necessity. The Second Ammendment to
the
U.S. Constitution is supposed to help, but it remains to be seen
whether it
matters much in a world where judges and executive functionaries
promulgate
more "law" than an already logorrheahic legislature does.


I can sympathize. I have made all kinds of claims about book-entry
versus
digital bearer settlement, for instance, and in the same spirit of
universal liberation from the nation-state, but those claims have so far
not proven to be "agreeable to experience", as Gibbon said once about
predicting the end of the world, a quote I used as a signature for a
decade
or so, until Eudora became obsolete, and I never got around to
re-instantiating it in Apple Mail.


All of which brings us to Rush Limbaugh's Undeniable Truth of Life
Number
Six: "The world is governed by the aggressive use of force."

An assertion that separates, rather sharply, those of us who are still
politically conservative from other people who would normally agree
with us
on a whole lot of other things -- including most of von Mises' followers
today.

To bash Gibbon's words to fit (and paint them to hide the damage :-)),
however it may deserve respect for its usefulness and antiquity, the
non-aggression principle itself has not been found agreeable to
experience.
Like the old arguments about the nuclear first-strike option, sometimes
it's better to remove a threat before it kills you, rather than after.

Or at least make the other guy think you can. "Weakness is
provocative", as
Rumsfeld said more than once -- along with "we don't want to see a
smoking
gun from a weapon of mass destruction."

Sometimes you really do have to dance with the girl that brung ya.
Even if
she is a force monopolist parasite on free people everywhere. :-/.


Cheers,
RAH
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<http://online.wsj.com/article/SB10001424052748704471504574443600711779692
.
html#printMode>

OPINION
NOVEMBER 6, 2009, 9:58 P.M. ET

The Man Who Predicted the Depression
Ludwig von Mises explained how government-induced credit expansions
led to
imbalances in the economy.

By MARK SPITZNAGEL

Ludwig von Mises was snubbed by economists world-wide as he warned of a
credit crisis in the 1920s. We ignore the great Austrian at our peril
today.
Mises's ideas on business cycles were spelled out in his 1912 tome
"Theorie
des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit").
Not
surprisingly few people noticed, as it was published only in German and
wasn't exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how
the
banking system was endowed with the singular ability to expand credit
and
with it the money supply, and how this was magnified by government
intervention. Left alone, interest rates would adjust such that only the
amount of credit would be used as is voluntarily supplied and
demanded. But
when credit is force-fed beyond that (call it a credit gavage),
grotesque
things start to happen.

Government-imposed expansion of bank credit distorts our "time
preferences," or our desire for saving versus consumption.
Government-imposed interest rates artificially below rates demanded by
savers leads to increased borrowing and capital investment beyond what
savers will provide. This causes temporarily higher employment, wages
and
consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the
systemthe pricing errors corrected, the half-baked investments
liquidated, like a supple tree yielding to the wind and then
returning. But
when the government holds rates artificially low in order to feed ever
higher capital investment in otherwise unsound, unsustainable
businesses,
it creates the conditions for a crash. Everyone looks smart for a while,
but eventually the whole monstrosity collapses under its own weight
through
a credit contraction or, worse, a banking collapse.

The system is dramatically susceptible to errors, both on the policy
side
and on the entrepreneurial side. Government expansion of credit takes a
system otherwise capable of adjustment and resilience and transforms it
into one with tremendous cyclical volatility.

"Theorie des Geldes" did not become the playbook for policy makers. The
1920s were marked by the brave new era of the Federal Reserve system
promoting inflationary credit expansion and with it permanent
prosperity.
The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor
Ludwig was very nearly alone in warning of the collapse to come from
this
credit expansion. In mid-1929, he stubbornly turned down a lucrative job
offer from the Viennese bank Kreditanstalt, much to the annoyance of his
fiancie, proclaiming "A great crash is coming, and I don't want my
name in
any way connected with it."

We all know what happened next. Pretty much right out of Mises's script,
overleveraged banks (including Kreditanstalt) collapsed, businesses
collapsed, employment collapsed. The brittle tree snapped. Following
Mises's logic, was this a failure of capitalism, or a failure of hubris?

Mises's solution follows logically from his warnings. You can't fix
what's
broken by breaking it yet again. Stop the credit gavage. Stop inflating.
Don't encourage consumption, but rather encourage saving and the
repayment
of debt. Let all the lame businesses failno bailouts. (You see where
I'm
going with this.) The distortions must be removed or else the precipice
from which the system will inevitably fall will simply grow higher and
higher.
Mises started getting some much-deserved respect once "Theorie des
Geldes"
was finally published in English in 1934. It is unfortunate that it
required such a disaster for people to take heed of what was the one
predictive, scholarly explanation of what was happening.

But then, just Mises's bad luck, along came John Maynard Keynes's tome
"The
General Theory of Employment, Interest and Money" in 1936. Keynes was
dapper, fresh and sophisticated. He even wrote in English! And the guy
had
chutzpah, fearlessly fighting the battle against unemployment by running
the currency printing press and draining the government's coffers.

He was the anti-Mises. So what if Keynes had lost his shirt in the
stock-market crash. His book was peppered with fancy math (even Greek
letters) and that meant rigor, modernity. To add insult to injury, Mises
wasn't even refuted by Keynes and his ilk. He was ignored.

Fast forward 70-some years, during which we saw Keynesianism's repeated
disappointments, the end of the gold standard, persistent inflation with
intermittent inflationary recessions and banking crises, culminating in
Alan Greenspan's "Great Moderation" and a subsequent catastrophic
collapse
in housing and banking. Where do we find ourselves? At a point of
profound
insight gained through economic logic, trial and error, and objective
empiricism? Or right back where we started?

With interest rates at zero, monetary engines humming as never before,
and
a self-proclaimed Keynesian government, we are back again embracing the
brave new era of government-sponsored prosperity and debt. And, more
than
ever, the system is piling uncertainties on top of uncertainties,
turning
an otherwise resilient economy into a brittle one.

How curious it is that the guy who wrote the script depicting our never
ending story of government-induced credit expansion, inflation and
collapse
has remained so persistently forgotten. Must we sit through yet another
performance of this tragic tale?

Mr. Spitznagel is the founder and chief investment officer of the hedge
fund Universa Investments LP, based in Santa Monica, Calif.



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