Jim Grant on Irving Fisher and his desire to smooth out the boom-and-bust cycle

[Irving] Fisher was a man of few doubts and boundless energy.  He advocated for public health (with all the authority of the tuberculosis survivor that he was), prohibition, common stocks, eugenics, longevity through vegetarianism, Indian meditation - and government economic management.  An enlightened central bank could neutralize booms and busts alike by controlling the stock of money, or so he proposed.

Fisher rejected the Bryanite campaign for lots of silver dollars.  But he did not reject the notion that the quantity of money was of the utmost importance in determining prices and wages.  Neither did he share his contemporaries' fatalism with respect to the cycles of credit and business.

Stability was the ticket, he said.  The price level should neither rise nor fall but should remain the same.  Justice to debtors and creditors demanded it.  And enlightened central bankers might achieve it.  The age of laissez-faire was over, declared Fisher in 1906.

~ James Grant, The Forgotten Depression: 1921: The Crash That Cured Itself (2014), p. 28

Irving Fisher on easy money

Easy money is the great cause of overborrowing.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Irving Fisher on the causes of over-indebtedness

44. The over-indebtedness hitherto presupposed must have had its starters. It may be started by many causes, of which the most common appears to be new opportunities to invest at a big prospective profit, as compared with ordinary profits and interest, such as through new inventions, new industries, development of new resources, opening of new lands or new markets. Easy money is the great cause of overborrowing. When an investor thinks he can make over 100 per cent per annum by borrowing at 6 per cent, he will be tempted to borrow, and to invest or speculate with borrowed money. This was a prime cause leading to the over-indebtedness of 1929. Inventions and technological improvements created wonderful investment opportunities, and so caused big debts. Other causes were the left-over war debts, domestic and foreign, public and private, the reconstruction loans to foreigners, and the low interest policy adopted to help England get back on the gold standard in 1925.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Irving Fisher anticipates the modern day Fed

42. If the debt-deflation theory of great depressions is essentially correct, the question of controlling the price level assumes a new importance; and those in the drivers' seats—the Federal Reserve Board and the Secretary of the Treasury, or, let us hope, a special stabilization commission—will in future be held to a new accountability.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Irving Fisher: laissez-faire approach to Depression would have led to a political revolution

39. If even then our rulers should still have insisted on "leaving recovery to nature" and should still have refused to inflate in any way, should vainly have tried to balance the budget and discharge more government employees, to raise taxes, to float, or try to float, more loans, they would soon have ceased to be our rulers. For we would have insolvency of our national government itself, and probably some form of political revolution without waiting for the next legal election.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Iriving Fisher: FDR's reflation efforts not enough to reach bottom (1933)

39. Those who imagine that Roosevelt's avowed reflation is not the cause of our recovery but that we had "reached the bottom anyway" are very much mistaken. At any rate, they have given no evidence, so far as I have seen, that we had reached the bottom. And if they are right, my analysis must be woefully wrong. According to all the evidence, under that analysis, debt and deflation, which had wrought havoc up to March 4, 1933, were then stronger than ever and, if let alone, would have wreaked greater wreckage than ever, after March 4.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Irving Fisher on reflation as preventing depression

38. [I]t is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Irving Fisher on alternative explanations of the boom-bust cycle

15. While any deviation from equilibrium of any economic variable theoretically may, and doubtless in practice does, set up some sort of oscillations, the important question is: Which of them have been sufficiently great disturbers to afford any substantial explanation of the great booms and depressions of history?

16. I am not sufficiently familiar with the long detailed history of these disturbances, nor with the colossal literature concerning their alleged explanations, to have reached any definitive conclusions as to the relative importance of all the influences at work. I am eager to learn from others.

17. According to my present opinion, which is purely tentative, there is some grain of truth in most of the alleged explanations commonly offered, but this grain is often small. Any of them may suffice to explain small disturbances, but all of them put together have probably been inadequate to explain big disturbances.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Irving Fisher on the business cycle

6. There are two sorts of cyclical tendencies. One is "forced" or imposed on the economic mechanism from outside. Such is the yearly rhythm; also the daily rhythm. Both the yearly and the daily rhythm are imposed on us by astronomical forces from outside the economic organization; and there may be others such as from sun spots or transits of Venus. Other examples of "forced" cycles are the monthly and weekly rhythms imposed on us by custom and religion. The second sort of cyclical tendency is the "free" cycle, not forced from outside, but self-generating, operating analogously to a pendulum or wave motion.

7. It is the "free" type of cycle which is apparently uppermost in the minds of most people when they talk of "the" business cycle.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Irving Fisher on main causes of boom and bust: over-indebtedness and deflation

19. I venture the opinion, subject to future evidence, that, in the great booms and depressions, each of the above-named factors has played a subordinate role as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price level disturbances.

While quite ready to change my opinion, I have, at present, a strong conviction that these two economic maladies, the debt disease and the price-level disease (or dollar disease), are, in the great booms and depressions, more important causes than all others put together.

Irving Fisher on the liquidation cure for busts

40. [I]t would be as silly and immoral to "let nature take her course" as for a physician to neglect a case of pneumonia. It would also be a libel on economic science, which has its therapeutics as truly as medical science.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Irving Fisher on debt, deflation and the business cycle

29. When over-indebtedness stands alone, that is, does not lead to a fall of prices, in other words, when its tendency to do so is counteracted by inflationary forces (whether by accident or design), the resulting "cycle" will be far milder and far more regular.

30. Likewise, when a deflation occurs from other than debt causes and without any great volume of debt, the resulting evils are much less. It is the combination of both—the debt disease coming first, then precipitating the dollar disease—which works the greatest havoc.

~ Irving Fisher, "The Debt-Deflation Theory of Great Depressions," September 1933

Murray Rothbard on economic methodology

Human life is not a laboratory, where all variables can be kept fixed by the experimenter, who can then vary one in order to determine its effects.  In human life, all factors, including human action, are variable, and nothing remains constant.  But the theorist can analyse cause-and-effect relations by substituting mental abstractions for laboratory experiments.  He can hold variables fixed mentally (the method of assuming 'all other things equal') and then reason out the effects of allowing one variable to change.  By starting with simple 'models' and introducing successive complications as the simpler ones are analysed , the economist can at last discover the nature and operations of the market economy in the real world.  Thus the economist can validly conclude from his analysis that 'All other things equal (ceteris paribus), an increase in demand will raise price.'

~ Murray Rothbard, An Austrian Perspective on the History of Economic Thought, Vol. I, Chapter 12, "The founding father of modern economics: Richard Cantillon," p. 348

Murray Rothbard on Richard Cantillon and methodology

[Richard] Cantillon was one of the first to use such unique tools of economic abstraction as what Ludwig von Mises would later identify as the indispensable method of economic reasoning: the Gedanken-experiment (or thought-experiment).

~ Murray Rothbard, An Austrian Perspective on the History of Economic Thought, Vol. I, Chapter 12, "The founding father of modern economics: Richard Cantillon," p. 348

Jordan Peterson on egalitarianism vs. biological essentialism

The whole idea that people are a blank slate and that everyone's equal at birth and that everything that makes people different is a consequence of socialization - that bloody idea has been dead among anybody who is reasonably educated as a scientist - it's been dead, I would say since the mid '60s.  Dead!  No one even talks about it.  But among these postmodernist types, man, they don't give a damn for facts.  In fact, facts for them are merely whatever the current power hierarchy uses to justify their acquisition of power.

~ Jordan Peterson, "Postmodernism and Cultural Marxism," 17:45 mark, YouTube, July 7, 2017

Murray Rothbard on scientism

The key to scientism is its denial of the existence of individual consciousness and will.  This takes two main forms: applying mechanical analogies from the physical sciences to individual men, and applying organismic analogies to such fictional collective wholes as “society.”  The latter course attributes consciousness and will, not to individuals, but to some collective organic whole of which the individual is merely a determined cell.  Both methods are aspects of the rejection of individual consciousness.

~ Murray Rothbard, "What is the Proper Way to Study Man?," Mises.org, December 28, 2016

[Originally appeared as a chapter in Scientism and Values, Helmut Schoeck and James W. Wiggins, eds. (Princeton, N.J.: D. Van Nostrand, 1960). Excerpted from Economic Controversies.]

Murray Rothbard on Adam Smith's omission of entrepreneurship

[T]he greatest of the many defects in [Adam] Smith's theory was his totally discarding Cantillon's and Turgot's brilliant analysis of the entrepreneur.  It was as if these great eighteenth century Frenchmen had never written.  Smith's analysis rested solely on the capitalist investing 'stock' and on his labour of management and inspection; the very idea of the entrepreneur as a risk-bearer and forecaster was thrown away and, again, classical economics was launched into another lengthy blind alley.  If, of course, one persists in fixing one's vision on the never-never land of long-run equilibrium, where all profits are low and equal and there are no losses, there is no point in talking about entrepreneurship at all.

The political implications of this omission were also not lost on nineteenth century socialists.  For if there is no role for entrepreneurial profits in a market economy, then any existing profits must be 'exploitative,' far more so than the low, uniform rate existing in long-run equilibrium.

~ Murray Rothbard, An Austrian Perspective on the History of Economic Thought, Vol. I, Chapter 16, "The celebrated Adam Smith," pp. 459-460, 1995

Murray Rothbard explodes the Adam Smith myth

Adam Smith (1723–90) is a mystery in a puzzle wrapped in an enigma. The mystery is the enormous and unprecedented gap between Smith’s exalted reputation and the reality of his dubious contribution to economic thought.

Smith’s reputation almost blinds the sun. From shortly after his own day until very recently, he was thought to have created the science of economics virtually de novo. He was universally hailed as the Founding Father. Books on the history of economic thought, after a few well-deserved sneers at the mercantilists and a nod to the physiocrats, would invariably start with Smith as the creator of the discipline of economics. Any errors he made were understandably excused as the inevitable flaws of any great pioneer...

[B]usinessmen and free market advocates have long hailed Adam Smith as their patron saint...  On the other hand, Marxists, with somewhat more justice, hail Smith as the ultimate inspiration of their own Founding Father, Karl Marx...

As we have already seen, Smith was scarcely the founder of economic science, a science which existed since the medieval scholastics and, in its modern form, since Richard Cantillon. But what the German economists used to call, in a narrower connection, Das AdamSmithProblem, is much more severe than that. For the problem is not simply that Smith was not the founder of economics.

The problem is that he originated nothing that was true, and that whatever he originated was wrong; that, even in an age that had fewer citations or footnotes than our own, Adam Smith was a shameless plagiarist, acknowledging little or nothing and stealing large chunks, for example, from Cantillon. Far worse was Smith’s complete failure to cite or acknowledge his beloved mentor Francis Hutcheson, from whom he derived most of his ideas as well as the organization of his economic and moral philosophy lectures...

Smith not only contributed nothing of value to economic thought; his economics was a grave deterioration from his predecessors: from Cantillon, from Turgot, from his teacher Hutcheson, from the Spanish scholastics, even oddly enough from his own previous works, such as the Lectures on Jurisprudence (unpublished, 1762–63, 1766) and the Theory of Moral Sentiments (1759).

The mystery of Adam Smith, then, is the immense gap between a monstrously overinflated reputation and the dismal reality. But the problem is worse than that; for it is not just that Smith’s Wealth of Nations has had a terribly overblown reputation from his day to ours. The problem is that the Wealth of Nations was somehow able to blind all men, economists and laymen alike, to the very knowledge that other economists, let alone better ones, had existed and written before 1776. The Wealth of Nations exerted such a colossal impact on the world that all knowledge of previous economists was blotted out, hence Smith’s reputation as Founding Father.

~ Murray Rothbard, An Austrian Perspective on the History of Economic Thought, Vol. I, Chapter 16, "The celebrated Adam Smith," 1995

Murray Rothbard: Adam Smith was far from the Founding Father of economics

[Adam] Smith, far from being the founder of economics, was virtually the reverse.  On the contrary, Smith actually took the sound, and almost fully developed, proto-Austrian subjective value tradition, and tragically shunted economics on to a false path, a dead end from which the Austrians had to rescue economics a century later.  Instead of subjective value, entrepreneurship, and emphasis on real market pricing and market activity, Smith dropped all this and replaced it with a labour theory of value and a dominant focus on the unchanging long-run 'natural price' equilibrium, a world where entrepreneurship was assumed out of existence.  Under Ricardo, this unfortunate shift in focus was intensified and systematized.

If Smith was not the creator of economic theory, neither was he the founder of laissez-faire in political economy.  Not only were the scholastics analysts of, and believers in, the free market and critics of government intervention; but the French and Italian economists of the eighteenth century were even more laissez-faire-oriented than Smith, who introduced numerous waffles and qualifications into what had been, in the hands of Turgot and others, an almost pure championing of laissez-faire.  It turns out that, rather than someone who should be venerated as creator of modern ecnoomics or of laissez-faire, Smith was closer to the picture portrayed by Paul Douglas in the 1926 Chicago commemoration of The Wealth of Nations: a necessary precursor of Karl Marx.

~ Murray Rothbard, An Austrian Perspective on the History of Economic Thought, introduction, pp. xi-xii

Jim Grant on negative interest rates and the ghost of Irving Fisher

It's tempting to try to imagine how [Irving] Fisher would react to the negative interest rates of 2019.  He certainly had nothing against innovation.  One can imagine him falling in with the new thinking, or even, perhaps, leading it.  He was an inveterate tinkerer and an ardent reflationist.

If his analysis was correct, Fisher wrote in 1933, "it is always economically possible to stop of prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that [price] level unchanged."

The mind - at least our mind - boggles at the otherworldliness of this casual prescription.  "Simply by reflating?"  The dubious record of so-called quantitative easing suggests there would be nothing simple about it.  As to the unintended consequences of this prospective intervention, Fisher is silent.

~ Jim Grant, "The best economist on the lowest rates," Grant's Interest Rate Observer, July 26, 2019

Jim Grant on the Hell that negative interest rates hath wrought

Dogmatism is foolish in this time of unprecedented wonders, but there's no law against opinions.  Here is our first opinion.  Because negative interest rates do not conform to human nature, as [Irving] Fisher demonstrated and common sense concurs, the market did not spontaneously produce them.  The central banks finagled them.

We have more opinions:

• The evil fruit of artificially low interest rates (even slightly positive ones) is an eventual financial crisis.
• Crisis will lead to still more central bank activism and, finally, to a loss of confidence in money itself.

~ Jim Grant, "The best economist on the lowest rates," Grant's Interest Rate Observer, July 26, 2019

BlackRock strategist on negative yielding bonds

There's no chapter in your bond math book on this.

~ Scott Thiel, chief fixed-income strategist, BlackRock, as quoted in "The Bonds That Eat Your Money," Bloomberg Businessweek, July 29, 2019

James Montier on Modern Monetary Theory and fiscal policy

MMT is aligned with functional finance, which simply says fiscal policy should aim to generate full employment rather than a balanced budget. There’s this fallacy that what’s true for a household is true for government. So you hear from all sorts of policy wonks that the U.S. and XYZ nation are running out of money. Well, that’s just not possible.

~ James Montier, strategist, GMO, "In Defense of Modern Monetary Theory," Barron's, July 27, 2019

Barron's on the bizarro world of negative yielding bonds

There’s a hot new investment trend sweeping global markets: losing money on purpose. Some $13 trillion in bonds worldwide had negative yields as of the end of June, up from $8 trillion at the end of last year.

That works out to $1,700 worth for each person on Earth, which you’d think would be enough to satisfy demand for turning savings into less savings. Nope. The European Central Bank just signaled that it wants to begin pushing yields lower. It recently passed Japan as the No. 1 player in subzero yields.

 Things are getting weird for bonds in Europe. Even some junk-rated debt there pays less than nothing. Greece, which missed the deadline for a loan payment to the International Monetary Fund in 2015, a first for a developed country, now comes in below the U.S. on 10-year yields. Switzerland’s 50-year bonds just went negative. That makes it the second country, after Denmark, to have minus signs across all maturities.

If tight trousers have taught us anything, it’s that developments in Europe can eventually squeeze America. Euro-denominated bonds from companies like McDonald's, Apple, and AT&T are priced for negative yields...

~ Jack Hough, "Why Some Investors Are Buying Bonds That Lose Money," Barron's, July 27, 2019

Barron's: DOJ goes after Big Tech even though "none of the companies have traditional monopoly positions"

The Justice Department announced late Tuesday that it has opened a review of “the practices of market-leading online platforms.” The agency didn’t name specific companies, but the wording suggests that it will look into Google parent Alphabet for search, Facebook for social media, and Amazon.com for e-commerce.

[...]

[P]roving consumer harm is a tough task when Facebook’s and Google’s services are mostly free, and Amazon’s e-commerce platform has arguably lowered prices and increased convenience through faster delivery.

In fact, none of the companies have traditional monopoly positions in various markets. EMarketer estimates that Amazon represented 37% of U.S. e-commerce sales in 2018 and 3.5% of total retail sales. The firm also said Google accounted for 50% of U.S. digital-ad spending that year, while Facebook had 22%. Apple’s iPhone had 45% of the U.S. smartphone market, according to eMarketer’s latest data.

~ Tae Kim, "Why Investors Shouldn’t Overreact to the DOJ’s Antitrust Review of Big Tech," Barron's, July 27, 2019

James Montier on the fragility of corporate debt

A huge amount of corporate debt creates a systemic vulnerability. Half of the outstanding corporate debt is now rated the lowest investment grade, which really is quite worrying. At some stage, we’ll encounter a downturn. As an equity investor, you’re junior to this paper that needs to be paid.

~ James Montier, strategist, GMO, "In Defense of Modern Monetary Theory," Barron's, July 27, 2019

John J. Raskob on stocks for the long run (1929)

If a man saves $15 a week and invests in good common stocks,  at the end of twenty years he will have at least $80,000 and an income from investments of around $400 a month.  He will be rich.

~ John J. Raskob, chairman of the Democratic Party, "Everybody Ought to Be Rich: An Interview with John J. Raskob," Ladies' Home Journal, article written by Samuel Crowther, August 1929

H.L. Mencken on government and decency

Every decent man is ashamed of the government he lives under.

~ H.L. Mencken

National Review defends central planning... in the name of defending capitalism

The tensions that arise among the demands of these different institutions [family, religion, schools, civic associations, political bodies, and more] and the commitments that constitute our social order can often be addressed by individuals setting priorities in their own lives. But there are also instances when dealing with such tensions requires politics. This means that sometimes our economic policy has to be determined by more than purely economic considerations — by our sense of the kind of society we want to be and the kinds of goals we want to pursue together. Overall economic growth is one such vital goal, as surely everyone agrees. But there are other goals that matter, including equity, cultural vitality, social order, family formation, piety and religious liberty, individual and national self-sufficiency, personal liberty and communal self-determination, and moral traditionalism and moral pluralism, among many others. Ordering these frequently competing or contradictory ends in hard cases is part of what our politics is for, and the argument for capitalism cannot be an argument for putting economics above all else.

To suggest that our commitments to market ideals must be moderated in this way, and also that they should be allowed to moderate some of our other commitments, is not to attack capitalism, but to defend it... [C]apitalism needs conservative defenders, and deserves to have them.

~ Yuval Levin, "The Free-Market Tradition," National Review, May 2, 2019

Ed Bugos: investors are "playing poker" and "calling the Fed's hand"

The difference between this new high in the stock market and the others (2016, 2013, 2011) that have occurred over the course of the latest unsoundly inflated global economic boom - besides how narrow and generally hollow it is - is that the other new highs were caused by an unexpected boost in the money supply that happened first while this one has been caused by expectations for a boost in the money supply (that's how they lower the rate of interest) that has yet to happen.

What that means my dear friends is that the bulls are playing poker. They have driven the stock averages to new heights and in doing so are calling the Fed's hand. If the Fed fails to cut rates and earnings don't come in particularly well, the market is likely to take a very big hit.

~ Edmond Bugos, July 24, 2019