Tag Archives: Austrian Economics

What has the Government Done to our Money?


Once again it’s time to review basic economics. When we invest in equity, we take a dollar from current consumption to gain title to capital goods (a company) which will pay out dividends and/or our investment will eventually be sold for dollars for future consumption.

If you do not understand money in a free society and how government came to meddle with money, you will not understand our ponzi financial system.

A short, clear book on money by Murray Rothbard is excellent. http://mises.org/books/whathasgovernmentdone.pdf

If you read any book to understand our current situation read that one. To understand more about money, banking, and monetary history read the following:

  1. http://mises.org/books/mysteryofbanking.pdf  How fractional reserve banking works.
  2. http://mises.org/books/historyofmoney.pdf  The history of American Banking
  3. http://mises.org/Rothbard/AGD.pdf   The definitive study of the the cause of the Great Depression

Investors discussing the dangers of inflation in today’s investment environment

Julian Robertson Part 1: http://video.cnbc.com/gallery/?video=3000062558

Part 2: http://video.cnbc.com/gallery/?video=3000062485

Kyle Bass: part 1: http://watch.bnn.ca/library/#clip584881

Part 2: http://watch.bnn.ca/the-street/december-2011/the-street-december-13-2011/#clip584882

Economic ignorance Refuted

Here is an article by an investing pundit that is riddled with nonsense and ignorance. No wonder the writer blew up his clients as a securities analyst in the late 1990’s and early 2000’s. http://www.businessinsider.com/keynes-was-right-2011-12

A reply to the above article and an excellent blog: http://finance.townhall.com/columnists/jeffcarter/2011/12/18/obama_and_the_keynesians_total_fail/page/full/

If you read the above recommended books, you will have an excellent grasp of our current monetary chaos, possible solutions and the consequences of our nation’s current course of action. Ignorance is not an excuse.

Strategic Logic Quiz, Review of Austrian Economics, and What about Tomorrow?

The three biggest achievements of the Cuban revolution are health, education, and low infant-mortality rates, and that its three biggest failures are breakfast, lunch, and dinner. — Government Worker, Habana, Cuba.

Strategic Logic Quiz

Last week, I promised the greatest business analysis ever done.  See here: http://wp.me/p1PgpH-cs

A reader, Logan, gave a strong hint for the solution.  Before I post the answer, let’s try another question.

Use Munger’s multidisciplinary thinking or Professor Greenwald’s strategic logic to find an answer to the following problem: The Cuban dictatorship collapses and property rights are restored. You have been given the job to develop a business in Cuba with barriers to entry.  You must build a business with the strongest combination of competitive advantages. What business would you choose, why and how would you build barriers to entry? How many advantages can you design for development? If you come up with a sensible plan, you will be given $5 million to start.

Two hints: the business can not be involved in cigars or tourism (like hotels or restaurants). A reading of Cuban business history would lead you to an answer, but I presume many have little knowledge of that history.

Tip: A great way to learn about businesses is to read corporate history or the biographies of business leaders.  You will sense how a business grows and develops advantages or loses them.

Austrian Economic Review

What are the markets telling us? Deflation has gold and commodities selling off?   I don’t think so. Never predict, but here goes………The Fed and the ECB both have the ability to print money and exchange good collateral for bad collateral with banks. What do central banks know how to do? What motivates central bankers? What are the monetary aggregates telling us?

The dollar is weak: http://scottgrannis.blogspot.com/2011/12/dollar-is-still-very-weak.html#links

Keeping an eye on longer-term investors: Insiders are long-term bullish. http://www.marketwatch.com/story/those-bullish-corporate-insiders-2011-12-07

Place facts into a coherent theory

How do we place facts into context? A rap video of Hayek (Austrian Economist) vs. Keynes (An Interventionist)http://www.youtube.com/watch?v=d0nERTFo-Sk

Bernanke vs. the Austrians during the housing bubble:http://www.youtube.com/watch?feature=player_embedded&v=MnekzRuu8wo

What confidence do you have in Bernanke’s planning ability or in bureaucrats controlling our monetary system?

Inflation today: http://www.economicpolicyjournal.com/2011/12/exposed-why-krugman-smoothed-inflation.html

Note the unusual bond yields.http://scottgrannis.blogspot.com/2011/12/bond-yields-are-out-of-whack.html

MF Global is an example of our Ponzi financial system in action: http://lewrockwell.com/french/french143.html

Murray Rothbard wrote, “If no business firm can be insured, then an industry consisting of hundreds of insolvent (banks) firms is surely the last institution about which anyone can mention ‘insurance’ with a straight face. ‘Deposit insurance’ is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public.”

Our Media

The videos below reinforce the need to read original documents or to speak to people who are actually involved in an industry or sent to war rather than believing our press. Excuse the political connotations.

A savage spoof of the media and our government that hits closer to the truth than I would like! Hitler reacts to Ron Paul’s Rise in the Polls: http://www.youtube.com/watch?src_vid=fFbc3sHl3Ic&annotation_id=annotation_162843&feature=iv&v=5ScPXDRcIfc

War and the importance of understanding history: http://www.youtube.com/watch?v=I8NhRPo0WAo&feature=youtu.be  Note that many against war are the folks who actually have experienced it.

Entrepreneurial Alertness

A podcast on finding opportunity: http://www.economicpolicyjournal.com/search/label/The%20Robert%20Wenzel%20Show  Scroll down to the second or third show.

Adapt or Die: Be Creative and Sell your Skills http://www.lewrockwell.com/north/north1073.html

Old (2007) but detailed Longleaf Interview:  http://www.palmerstongroup.com/articles/2007july/interview.html

Interesting Blog from a former Wall Streeter: Reading Fiction will Make You a Better Investor: http://interloping.com/

Have a great day and weekend.

The Best Blog for Behavioral Investing and Improving Your Thinking

The best blog for improving your thinking: www.simoleonsense.com.  You will learn about your own psychology and how you think—essential knowledge for becoming a better investor.  The material on this blog has excellent links.

New York Times Article on the Khan Academy

As previously mentioned, the Khan Academy is a great learning resources for you and for kids. Brush up on statistics, for example.


Referred to here:http://csinvesting.org/placing-ev-and-ebitda-into-perspective-case-studies/

A Protest at the Federal Reserve

http://www.newschannel5.com/story/16181894/protestors-disgruntled-with-federal-reserve-bank. Expect many more of these protests as our currency debasement continues.

Attack on the Austrian View of the Great Depression

I like to read theories, thoughts, or facts contrary to what I think is correct. You test your thinking and, God forbid, you could be wrong. The Great Depression will help you understand the biggest business cycle and depression of the past two centuries. Read: mises.org/rothbard/agd.pdf (Copy and paste into your browser.)

An article on the Austrian view of the Great Depression and the criticism of that view: http://mises.org/daily/5826/Defending-the-Austrian-Explanation-of-the-Great-Depression-from-an-Internet-Attack

Planning Curriculum

I will start this week planning the curriculum to study strategic logic while developing the building blocks for valuation, then tying the two together.

Some Useful Links…………

Common Sense

I enjoy reading the irreverent James Altucher: http://www.jamesaltucher.com/2011/11/how-to-have-more-common-sense/

Maudlin Reports

Sometimes you can find interesting articles on investing here-subscribe for free: http://www.frontlinethoughts.com/subscribe

Research Reports

Research Report on the Real Effects of High Government Debt: http://www.bis.org/publ/othp16.pdf

The end of the welfare state is now in process. High government debt hurts future growth. The report doesn’t discuss the cause of the problems only the impending effects. The parasite (govt.) has sucked the host (private enterprise) dry. So….ongoing volatility will be our friend as governments try to avoid the inevitable.

Mauboussin Articles

https://www.lmcm.com/default.asp?P=868060&S=868156  His articles can be of interest though somewhat too intellectual/academic for my tastes.

Prices Rising

Prices rising but still there is a call for pursuing a failed policy. Conventional “Economists” and pundits haven’t learned in 200 years:


The average rent for a Manhattan apartment in October was $3,341, that’s 7% higher than October, 2010, reports the NY Daily News. Rents are just $53 off their all-time high of $3,394 reached pre-crisis in May 2007. The vacancy rate in October was 1.18%, below October 2010’s rate of 1.24%.

The Austrian School

Articles of interest:http://mises.org/daily/5796/The-Clear-Language-of-the-Austrian-School and http://mises.org/daily/1533/Housing-Too-Good-to-Be-True

Wall Street Protests, Black Death and The Case Against the Fed

Wall Street Protests

On my way home I stopped to speak to several Wall Street protestors. Many seem angry and confused over bailouts for fat cats, banks, and the corporate elite while they struggle to find work, pay off debts, and redress unfairness.  I don’t blame them for their fears and protests. Several told me that capitalism was corrupt. Socialism would work much better instead.  Oh, how people never learn from history.

First, I find it ironic that Cubans are desperate to flee in make-shift rafts across shark infested waters to leave a crumbling socialist state to reach America. Second, how can capitalism fail when we don’t have free markets in the U.S.?  Our cartelized banking system reflects corporatism. If you believe that prices matter in their ability to send signals to freely exchanging participants about how to allocate resources most efficiently and you believe that centralized planning ultimately fails (as shown by countries like Soviet Russia, North Korea, Communist China, etc.), then the Federal Reserve should be abolished.

Some of the protesters remind me of those who burned people alive at the stake to stop the bubonic plaque in the 1300s rather than fight the real cause—fleas on rats. Three minute rap video of the Bubonic Plague of 1347 (“Black Death”) http://www.youtube.com/watch?v=rZy6XilXDZQ

Question Everything

Before I provide an example of why the Federal Reserve’s debasement of the U.S. dollar is devastating to the poor and middle classes which is—I believe—the cause of the protests, I ask that you never accept what I say at face value. Seek out counter-arguments to disprove even your own most cherished beliefs.

I am not saying you should attack yourself like Jim Carrey in Liar, Liar’s bathroom scene:http://www.youtube.com/watch?v=95CiLobvTj8

Nor will disagreeing without a basis help you find the truth. http://www.youtube.com/watch?v=Dx32b5igLwA&feature=related

I will put forth an Austrian argument of the case against the Fed but here is an article on, Why I am not an Austrian Economist (a critique on Austrian principles) http://econfaculty.gmu.edu/bcaplan/capdebate.htm

A discussion of the above article both defending and attacking Austrian economic theory. http://mises.org/Community/forums/p/3841/52624.aspx

An extensive reading list: http://mises.org/Community/forums/t/762.aspx

Of course, seeking out counter arguments against your investment thesis is critical to improving your thinking process and investing. Stress test your ideas.  Be as astute in laying out the arguments against your idea as for your idea.

The Case Against the Fed

An example of the devastating effects of the Fed’s Dollar debasement on America’s poor and middle-class is excerpted from Murray Rothbard’s
The Case Against The Fed. Found here for free at: http://mises.org/books/fed.pdf  (164 pages). 

In real life, then, the very point of counterfeiting is to constitute a process, a process of transmitting new money from one pocket to another, and not the result of a magical and equi-proportionate expansion of money in everyone’s pocket simultaneously. Whether counterfeiting is in the form of making brass or plastic coins that simulate gold, or of printing paper money to look like that of the government, counterfeiting is always a process in which the counterfeiter gets the new money first.

This process was encapsulated in an old New Yorker cartoon, in which a group of counterfeiters are watching the first $10 bill emerge from their home printing press. One remarks: “Boy, is retail spending in the neighborhood in for a shot in the arm!”

And indeed it was. The first people who get the new money are the counterfeiters, which they then use to buy various goods and services. The second receivers of the new money are the retailers who sell those goods to the counterfeiters. And on and on the new money ripples out through the system, going from one pocket or till to another. As it does so, there is an immediate redistribution effect. For first the counterfeiters, then the retailers, etc., have new money and monetary income which they use to bid up goods and services, increasing their demand and raising the prices of the goods that they purchase. But as prices of goods begin to rise in response to the higher quantity of money, those who haven’t yet received the new money find the prices of the goods they buy have gone up, while their own selling prices or incomes have not risen.

In short, the early receivers of the new money in this market chain of events gain at the expense of those who receive the money toward the end of the chain, and still worse losers are the people (e.g., those on fixed incomes such as annuities, interest, or pensions) who never receive the new money at all.

Monetary inflation, then, acts as a hidden “tax” by which the early receivers expropriate (i.e., gain at the expense of) the late receivers. And of course since the very earliest receiver of the new money is the counterfeiter, the counterfeiter’s gain is the greatest. This tax is particularly insidious because it is hidden, because few people understand the processes of money and banking, and because it is all too easy to blame the rising prices, or “price inflation” caused by the monetary inflation on greedy capitalists, speculators, wild-spending consumers, or whatever social group is the easiest to denigrate.

Obviously, too, it is to the interest of the counterfeiters to distract attention from their own crucial role by denouncing any and all other groups and institutions as responsible for the price inflation. The inflation process is particularly insidious and destructive because everyone enjoys the feeling of having more money, while they generally complain about the consequences of more money, namely higher prices. But since there is an inevitable time lag between the stock of money increasing and its consequence in rising prices, and since the public has little knowledge of monetary economics, it is all too easy to fool it into placing the blame on shoulders far more visible than those of the counterfeiters.

The big error of all quantity theorists, from the British classicists to Milton Freidman, is to assume that money is only a “veil,” and that increases in the quantity of money only have influence on the price level, or on the purchasing power of the money unit. On the contrary, it is one of the notable contributions of “Austrian School” economists and their predecessors, such as the early-eighteenth-century Irish-French economist Richard Cantillon, that, in addition to this quantitative, aggregative effect, an increase in the money supply also changes the distribution of income and wealth. The ripple effect also alters the structure of relative prices, and therefore of the kinds and quantities of goods that will be produced, since the counterfeiters and other early receivers will have different preferences and spending patterns from the late receivers who are “taxed” by the earlier receivers.

Furthermore, these changes of income distribution, spending, relative prices, and production will be permanent and will not simply disappear, as the quantity theorists blithely assume, when the effects of the increase in the money supply will have worked themselves out.

In sum, the Austrian insight holds that counterfeiting will have far more unfortunate consequences for the economy than simple inflation of the price level. There will be other, and permanent, distortions of the economy away from the free market pattern that responds to consumers and property-rights holders in the free economy. This brings us to an important aspect of counterfeiting which should not be overlooked. In addition to its more narrowly economic distortion and unfortunate consequences, counterfeiting gravely cripples the moral and property rights foundation that lies at the base of any free-market economy.

Are you surprised with the government’s and banker’s lust for inflation at the expense of the poor?  Imagine if the Afghanistan and Iraq (undeclared) wars had to be paid for through sur-taxes rather than the hidden taxes of debasement? Think of the lives saved as Americans rebelled against paying for ten years of military conflict.

The status quo press and economists say here in this New York Times article:http://www.nytimes.com/2011/11/06/opinion/sunday/worldly-philosophers-wanted.html that “UNFETTERED” capitalism caused the global crisis.  With flawed thinking (logically false premises can not make an assertion true) like that is it any wonder the Fed has the cover of legitimacy?

Economic Depressions: Their Cause and Cure

Banks would never be able to expand credit in concert were it not for the intervention and encouragement of government.   –Murray N. Rothbard

We investors live in the present and try to imagine the future, but we’d be wiser and richer if we had a better grounding in the past. In science, progress is cumulative; we stand on the shoulders of giants. In finance, however, progress is cyclical; we take one step forward, another back. Some of the best ideas about money and banking are the ones we’ve forgotten. I mean to revive them. –James Grant**

Murray N. Rothbard, the American Dean of the Austrian School, has an essay on what causes booms and busts. The 52 page book is here:

http://mises.org/Books/economic_depressions_rothbard.pdf  This essay is an easy read for readers who want to dip their toe into this subject.

**Grant’s Interest Rate Observer, October 21, 2011 (Vol. 29, No. 20).

I mentioned the value of reading Grant’s here: http://csinvesting.org/2011/09/08/welcome-to-csinvesting-org/

At Grant’s Interest Rate Observer http://www.grantspub.com/ you could download and study all past issues since 1982 while learning how a thoughtful, articulate Graham and Dodd investor approached various market cycles through specific investments. Of course, as an ambitious student you would download the financials from the SEC’s website to look at the various companies Grant’s mentions as well as reading many of the books he suggests. Now I admit the person who applies himself to such a project would not be your typical person, but I am suggesting one way to learn.

Surprise! Inflation Rising and One-Half of the Investment Equation

Predicting the Market

God developed a computer to determine the IQ of the human race. The computer would be able to tailor a question based on the IQ of the respondent.

The most difficult question was, “How does Stephen Hawkins’ Theory of Relativity compare to Einstein’s?

The question of moderate difficulty was, “Who do you think will win the World
Series this year?”

The question designed for the lowest of intelligence was, “What do you think of the stock market?”

Inflation & Debasement and a False Boom

Predicting the direction and timing of the market is a fools’ game, but not to be aware of the underlying forces in the economy will hurt you as an investor.  Right now, (October 18th, 2011) the Federal Reserve is hoping to ignite a (nominal) boom in asset prices. The stock market may go up, but the real return relative to other asset prices may not be as great. If you understand the
Austrian Business Cycle Theory, and you observe the Federal Reserve’s actions,
then the boom in producer prices is not a surprise. For the past 39 years the
world’s currency system has not been anchored to something of intrinsic value. We live in a world of fiat currencies (the PhD Standard) and fractional
reserve banking—Ponzi Finance—so not to be aware of what is occurring is financial suicide.

Half of the Investment Problem

As you take a dollar out of your pocket to invest in a company, you hope that when you sell your investment, the share(s) of stock, the dollars that you receive
will purchase a similar or greater basket of goods and services. You spend
hours studying a company as an investment, but why not spend a minute thinking about what gives value to the dollar in your pocket? What effects that dollar is one-half of every investment decision.

Today Producer Price Index rose 0.8% or 9.6% annualized. How would you like to own 30-year government bonds generating 3.5%? Ouch!  How could anyone be surprised if you saw these statistics from the Federal Reserve:

Pct. Chg. at seasonally adj. annual rates      M1                    M2


3 Months from June 2011 TO Sep. 2011         36.6                  21.4

6 Months from Mar. 2011 TO Sep. 2011           24.9                    14.8

12 Months from Sep. 2010 TO Sep. 2011         20.0                    10.2

The growth in money supply is just one-half of the equation, the other half is the
demand for money based on loan demand and banks’ ability and willingness to
lend. However, seeing half the cards while you opponent sees none is an
advantage. More importantly, you need a theory to understand economic laws of cause and effect that will give you understanding of where you are in an investment cycle.

Inflation & Debasement and Investing

I have been warning about inflation here: http://csinvesting.org/2011/09/19/current-inflation-charts/

I posted an article on investing and inflation here: http://csinvesting.org/2011/09/16/inflation-hyperinflation-and-investing-with-klarman-buffett-and-graham/

Learning About Austrian Economics

Oh how I wish when leaving the University with a BA in Economics I was told to unlearn every lesson and study Austrian Economics.  It’s what you think that’s so that isn’t so which KILLS YOU.

The best way to learn about how the economy works, booms and busts and what affects the value of your money would be to go here:

A course in economics: http://www.tomwoods.com/learn-austrian-economics/   An incredible learning resource

I consider one of the finest books on understanding how the world really works is http://mises.org/Books/mespm.PDF  and Study Guide: http://mises.org/books/messtudy.pdf

If you are ambitious, then further study here: http://www.capitalism.net/

More on Inflation

For an update on inflation: www.economicpolicyjournal.com)

The Producer Price Index for finished goods rose 0.8 percent in September,
seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.
Keynesian economists polled by Reuters had expected prices to increase 0.2 percent. The PPI climbed 6.9 percent for the 12 months ended September 2011.

In September, the increase in the index for finished goods was broad-based,
with prices for finished energy goods rising 2.3 percent, the index for
finished goods less foods and energy moving up 0.2 percent, and prices for
finished consumer foods advancing 0.6 percent.

The index for finished goods less foods and energy moved up 0.2 percent in
September, the tenth straight increase. Prices for finished consumer foods climbed 0.6 percent in September, the fourth consecutive monthly increase.

Price inflation continues to intensify, something that Keynesian economists
can’t explain with their models. Only an understanding of money flows and its
impact on the economy, something only understood by Austrian economists, can
explain what is going on now. Note to Keynesians: The price inflation is going
to get much worse.

Currently, Bernanke is printing money (M2) at very aggressive double-digit rates. It is this money printing that is fueling the manipulated boom. Since Keynesians don’t watch or understand the role money creation causes in the Fed created boom-bust cycle, they don’t see the manipulated boom coming until it is actually reflected in the economic data. That’s why, at present, the data are surprising them to the upside. The new Fed created money is pushing the economic data higher, but since they don’t understand Austrian Business Cycle Theory or “ABCT”, they won’t understand what is going on in the data until months of data role in showing the change in trend.

A Protester Speaks the Truth about the FED.

The purpose of this blog is not politics but self-directed  education, especially in business, economics, and finance.

A recent YouTube video struck me as a great  example of how a person can understand the world and its problems by taking a  vigorous effort to learn. The protester in the video below nails the problems our country is facing. He searched for the answers by reading  Austrian Economics. No one told him whom to study, he did his own research and  thought for himself. I would rather choose him to be an analyst or investor than a PhD. Nobel winning economist anytime.

A protester dares to speak the truth at Occupy  Wall Street:

http://www.youtube.com/watch?v=J0cp_DyfiRU&feature=related      7 minutes

The same protester explaining his position to  end the Federal Reserve Banking System at Occupy Wall Street:

http://www.youtube.com/watch?v=V6mlOzEMd5g       10 minutes

As he says, “In 1913 this country died when we got rid of sound money.”

Thomas Jefferson warned us two hundred years ago that a private central bank issuing the public currency was a greater menace to the liberties of the people than a standing army.