Noah Smith seems to have stirred up the hornets nest of Austrian economics. In fact, it looks like he might have fired some hornets spray into the nest, which naturally just irritates them even more.
Both Zero Hedge and Bob Murphy had long responses to Noah, but I think it might be a bit helpful to cover some of Noah’s key points in the article as I am not sure that either side is really explaining their point all that well (Noah seems to do so intentionally in fairness). Here’s the key points that Noah takes issue with:
1) Federal Reserve money-printing is a government plot to boost big banks,
2) prices are rising much faster than anyone thinks,
3) real “inflation” means money-printing, not an increase in prices,
4) printing money can never boost the economy,
5) academic economics is a plot to use mathematical mumbo-jumbo to cover up government giveaways to big banks, etc., etc.
Let’s take these point by point.
1) The Fed was created as a national clearinghouse for interbank payment settlement (see here for more details). So yes, the Fed obviously serves banks to some degree. And the purpose of serving the banks is to establish a regulated and central clearinghouse so that banks can operate more efficiently. Before the Fed we had private clearinhouses and they simply didn’t work all that well because they were still run by profit seeking bankers who would essentially shut down the clearinghouse in times of crisis when it was most needed. The formation of a national clearinghouse helped establish a more uniform and efficient banking system. And given that banks run the payment system which is central to the US economy, well, it’s important that they operate efficiently. And since we have a private for profit banking system which is run by bankers who take risks in seeking profit maximization, well, that banking system becomes unstable at times.
Of course, the Fed has become more than a clearinghouse, but this is still its primary purpose and its daily operations revolve almost entirely around this function. So yes, the Fed supports banks. That shouldn’t even be controversial or conspiratorial. It just is. If you think private bankers can do a better job than the Fed then perhaps you’re right. But then you’re really the one who is plotting to boost big banks as that would be a complete takeover of the monetary system by private bankers….I don’t know what the alternative is here, but in my view this public/private hybrid system appears to combine the strengths of the Federal government with the strengths of private competitive banking. It doesn’t work perfectly, but I don’t know what the superior alternative is….In my opinion it’s certainly not a complete government takeover of banking nor a complete private takeover.
So score one for the Austrians here.
2) This one refers to the common Austrian refrain that the government manipulates data like the CPI. And you get constant references to Shadow Stats or other price measures which don’t at all reflect the reality that we see in other data like bond yields, inflation expectations, independent inflation gauges or even the price of a Shadow Stats subscription itself. Inflation is not high in the USA and anyone betting on this or still arguing this has simply been wrong by almost any measure except for useless metrics (usually anecdotal or based on cherry picking).
So score one for Noah here.
3) Noah is referring to the way Austrians refer to “inflation” as a rise in the money supply as opposed to the price level. Many economists used to refer to inflation merely as a rise in the money supply and Austrians still adhere to that definition. So they’re not necessarily wrong. But I do think it can be pretty misleading to do so. The vast majority of money in our monetary system is deposits which are created any time a bank makes a loan. Over the long-term this is almost certain to rise in quantity. So there’s always inflation by this definition. Whether that is reducing our living standards is a totally different story though. It certainly could, but not necessarily. From what I gather Austrians generally assume that the government creates all the money in our monetary system through creating currency or deficit spending, but as any MR adherent knows, the government really doesn’t create money in any meaningful sense.
I’ll call this one a tie.
4) This point refers to a similar point in number 3. Austrians generally claim that “money printing” doesn’t generate real production which increases the real wealth of society. But again, loans create money and loans often fund investment, which most certainly creates real wealth (at least most of the time). QE clearly doesn’t create real wealth since it’s just an asset swap, but I also think it’s misguided to call it “money printing”. Deficit spending creates a net financial asset for the private sector (which creates financial wealth), but doesn’t necessarily create real wealth. But again, I wouldn’t call deficit spending “money printing” because the government isn’t creating money when they deficit spend. They are obtaining a bank deposit, redistributing it and issuing a bond.
I think Austrians tend to overreach politically here by assuming that “money printing” is done by the government and therefore can’t be a net positive. I think that’s a bit dogmatic even if it’s some times true. But I am not sure Noah would agree with the framework I am using here so I can’t necessarily say he’s right either.
Let’s call this one a tie.
5) It’s hard to take this one seriously as it again appears to be constructed around lots of anti government ideology. Then again, I have to agree that economists are trying way too hard to create math based models that give their work a more “scientific” feel. As Thomas Piketty said:
“Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.”
Overall, this battle looks like a draw. And while this battle might be a draw, as I conclude this piece I think we’re all on the losing end of having engaged in this to begin with….Damnit.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.