Two views on Globalization, America, and China

Coming Anarchy:

What’s more, the Chinese National Bureau of Statistics recently reported that the Chinese economy’s dependency rate on foreign economies exceeded 60 percent. For the first time, Beijing officially admitted for the first time that China’s more than 10 percent annual economic expansion is heavily dependent on the West. How the US goes, so goes the world. A lot of countries are going to start to discover that very shortly.

The China Explat:

That’s not to say that malinvestment has not occurred thanks to false demand from America (or more accurately, false supply from the very non-free market central banks of China and the US – there are very few individual Chinese investors stupid enough to throw a bunch of money into US treasuries). But this malinvestment only creates the illusion of wealth – an illusion that is now being pierced and would be shattered if China suddenly tried to exchange all of their US IOU’s for real goods.

The moment China gives up this illusion of wealth in the form of paper IOU’s, China will be better off, even if it means a painful restructuring of Chinese industry.

When China does this, they will have even more real savings to plunge back into the Chinese economy. And that means that China’s days of growth are far from over.

The reality: the economies of China and America are intertwined to the extent that disinvestment of one from the other is economically unthinkable.

24 thoughts on “Two views on Globalization, America, and China”

  1. Hi Tdaxp – Thanks for the link!

    Just wanted to clarify that I was writing about China trading in their IOUs for real assets, and only accepting real goods in return for those they send to America.

    No doubt the consequences of such action would be disastrous for the US, and hurt in the short run for China. But what is the other option? Keep trading real goods for IOUs?

    Cutting off real trade between the countries would be disastrous, for sure. To this extent I completely agree with your ending statement. But cutting off sending real goods in exchange for paper that is rapidly losing its value? That would be good for China, and bad for US consumers.

    @ElamBend & Jay – China does own a claim to a not so small share of US assets. But this isn’t the key point – instead what’s important is that the US is getting a free ride for sitting on their ass and sending out slips of paper in exchange for real goods.

    As Peter Schiff puts it, the US is now the Caboose of the world economy, with much of Asia being the engine. The moment that China stops accepting such false demand, prices will drop (in non-dollar terms, of course – although with the massive inflation from the central banks of the world you might have to price it in non-paper money to see the real coming drop) and many countries aside from the US will benefit.

    Unfortunately, this will also cause US interest rates and prices to go way up.

  2. The US is hardly the caboose of the world economy. For sure, China (and India) are providing a lot of the growth, but the sheer size of the US economy makes calling it the caboose difficult. Indeed, as bad as the US stock market is doing (and will be doing) all the other bourses are faring far worse.

    That being said, we will NEED to raise interest rates to make of for the poor monetary policy that we have pursued aka printing money. I don’t seen prices rising too much in nominal terms, but definitely in real terms. At the same time asset prices are going down. incidentally, this affects me in real estate (we’re already seeing it, too).

  3. As far as I understand it, Jeremy is arguing

    a) US currency (USD) has been depreciating in the short-term, relative to the Chinese currency (RMB)
    b) relatively higher economic growth in China than America will cause the USD to depreciate against the RMB in the long term
    c) therefore, China should cease accepting USD

    This sort of categorical analysis completely ignores the importance of rates-of-change that is driven home in any calc-based economics or finance class.

    I could raise security as a public sector export [1], but I think noting that Jeremy’s argument simply ignores rates of change (except for noting it would be “painful”) does enough to refute his assertion.

    [1] http://www.thomaspmbarnett.com/published/pentagonsnewmap.htm

  4. tdaxp – No, I’m arguing:

    a) The US has been receiving an excess of real goods from China for over a decade in exchange for paper – China sends goods, the US makes a computer entry.

    b) This is unsustainable no matter what over thel long run – some day those claims that the US are sending to China must come back, whether they have depreciated in the meantime or not. When they come back, it means a falling dollar and higher interest rates, and higher purchasing power for Chinese people.

    c) The US is heavily in debt to the world, is suffering and will suffer many more blowups in the financial markets as housing prices return to their historic trend, has huge amounts of entitlements it can scarcely afford in the years to come (to the tune of $50-80 trillion), and will likely continue to choose to print its way out of these problems. This is the reason the US dollar will continue to fall, it has nothing to do (directly at least) with China’s development.

    d) But it doesn’t make a huge difference whether the dollar falls first and then China stops accumulating excess IOUs or whether it is China and other countries getting rid of US IOUs that trigger a big fall in the dollar – either way China will not ship real goods in exchange for paper money forever, at some point they will start only accepting real goods and assets in exchange for real goods. That doesn’t mean a disentangling of China and America’s economies (the cutoff of real trade), but it does mean that China will have many more goods that will stay within its borders or go to other countries, in exchange for real goods. And it does mean that prices of goods from China in dollars will go up, and that the purchasing power of China and Chinese people will go up, all other things being equal. Because of c) above, this is likely to occur sooner rather than later.

    The argument for security as an export falls short because China still has a massive amount of claims for real goods, and isn’t going to trade it in anytime soon in exchange for US security services.

    I’m not sure what you are using rates of change to refer to but it seems you are referring to the $US – RMB exchange rate. What are you trying to say exactly?

  5. Jeremy

    What is currently going on is that China is exchanging a great many of the US dollars that they have accumulated over the years for oil and then selling gasoline and diesel within China at prices significantly below what they would be in a transparent world wide energy market. I guess you could look at that as a variation on their previous policy of keeping the exchange rate between their currency and the US dollar artificially low by accumulating dollars.

    At any rate, China continues to keep a lot of their population employed and happy making goods that they export to the United States which results in the Chinese population being content with the current government and that is the real goal. As China stops hoarding dollars and transfers them to oil producing countries, the value of the dollar drops, the price of oil rises, American exports become more competitive and Americans consume less oil.

  6. Jeremy,

    As I understand your claims

    a) China has been accumulating a large foreign currency reserve as a result of trade with the United States
    b) China’s rate of saving is unsustainably high
    c) The US economy is an unusually risky, relative to other large states
    d) China’s rate of consumption is unsustainably low

    (a) is trivially true and (c) is trivially false, so I won’t address either.

    (b) and (d) are differently worded versions of the same claim, which are probably true. Over the long term, if it trends in the same way as other states, China’s consumption will grow, accelerating the rate of increasing living standards in the short term and slowing the rate of increasing living standards in the long term.

    Now, certainly as China’s economy grows, the method of savings by individuals will diversify. Likewise, the Chinese state may one day be stable enough that it does not need to rely on foreign currency reserves.

    I get the feeling your point is larger than this, but I can’t see what else you are getting at?

    Mark in Texas,

    Excellent comment — you tied in several trends very adeptly.

  7. Mark,

    Your analysis is spot on, but doesn’t mention the coming (continuing) drop in the average consumer’s standard of living as prices of things not made in the US shoot up – in the short & medium run the increase in exports will nowhere near makeup for the decrease in buying power. Also I thought that China was still accumulating US dollar assets – so isn’t really ‘spending them down’.

    tdaxp,

    I’m not claiming that China’s high savings rates are unsustainable (though they may be), rather that exchanging real manufactured goods for IOUs (dollar assets above) from the US is unsustainable. Once China switches to only accepting real goods for real goods, several things will happen:

    1) – (Everything else being equal), prices in RMB for such goods will fall because of the elimination of false US demand
    2) – China will export less to the US, with the excess production being either consumed within China, saved, or shipped to other countries in exchange for other real goods.
    3) – One and two combined means that, everything else being equal, real savings and consumption in China should both rise.

    My larger point is that the US has been living on borrowed time by exchanging debt based assets in exchange for real goods from China and other countries, and that this is unsustainable – US living standards (all other things being equal, again) must fall and China’s must rise.

    c) above is far from trivially false, and you don’t have to look very far to see this these days (see nationalization of F&F, the enormous wave of ALT-A resets next year through the end of 2011, or the paper from one of the regional Federal Reserve banks where it says the US on its continued course will inevitably go bankrupt). The US financial system and hence economy are at greater risk than any other large country I can think of.

  8. Jeremy,

    Thank you for your comment.

    US living standards (all other things being equal, again) must fall

    This is the strongst claim you’ve made yet, if I understand it correctly.

    But i answer your other points, do you mean

    (a) US living standards must fall from its 2008 standards
    (b) US living standards must fall from heights it would otherwise achieve

    Thanks.

  9. Jeremy

    In the short and medium term I think that the Chinese are going to do what they have to in order to keep their products relatively cheap in the United States. That means that if you shop at Wal Mart the impact of the falling dollar will be minimal. If you like to buy upscale European stuff, things are going to get pricier.

    Eventually China will be selling a lot of cheap stuff into Africa and Central Asia but first those places will have to produce something worth exporting. If Africa can develop a sugar cane to ethanol industry, that would be a natural market for low quality Chinese goods like the Cherry automobile which failed US safety tests, toxic pet food and toys coated with lead based paint. If the African market becomes large enough, the Chinese will probably care less about keeping the exchange rate between their currency and the dollar quite so rigidly.

  10. Hi tdaxp – I think (a) and by quite a lot.

    Hi Mark – You may be right that China continues to follow a policy of keeping the RMB closely linked to the dollar and hence subsidizing US consumers – however, this means continuing inflation in China (the assumption being that the US is inflating its money supply at a rapid rate and will choose to continue to do so in the years to come), something that politically China cannot afford. There are just too many people with too little money for inflation to occur on a large scale without massive violence and possibly revolt.

    It seems there are major changes coming and that China will not do ‘what they have to in order to keep their products relatively cheap in the United States’ – probably in the short term, but definitely in the medium term. I also don’t think China necessarily needs a replacement market for the US – much of what they export now could be consumed by Chinese consumers, and would be if the RMB’s value was not held down by interventionist policies of buying up large amounts of US dollar assets.

  11. Jeremy

    While there is plenty of market economics going on in China, the place is still run by communists so when the government wishes, it can set the prices in a manner that minimizes social unrest which is the number one priority for the people in charge. We can see this with regard to the price of oil products in China. Gasoline and diesel are selling for about a dollar a gallon less than in the rest of the world. This gives Chinese industry a competitive advantage to pretty much everybody else in the world. A similar thing can be seen in the price of those steel intermodal container boxes. The Chinese government has decreed that they will sell for ~$1500 when a transparent market price for the steel, labor and equipment to build them would be closer to the $6,000 to $10,000 range depending on labor costs. This certainly works as a benefit to China’s exports.

    Another example is the massive increases in animal feed imports into China paid for with US dollars. Even though corn production in the US has increased so much that even after ethanol production, more corn is produced for animal feed than in previous years, Chinese purchases have driven up the world price of corn in dollar terms. The Chinese get rid of some of their dollars and the Chinese people get to eat more meat.

    My guess is that the Chinese will be buying vast amounts of cement and steel on the world markets in order to improve their infrastructure and raise Chinese living standards. The Chinese government has set the goal of connecting to every village in China with a paved road.

    So the Chinese are probably limited by their ability to absorb the stuff that they are buying with their dollars. As their country becomes more connected, that ability to absorb stuff goes up and they will be able to spend dollars faster which will decrease the dollar’s value in the world market but not result in much inflation in China or, for that matter, in the US.

  12. Hi Mark,

    It’s funny that China gets called communist for gasoline subsidies and the like but the US isn’t called communist for nationalizing the only effective pricing mechanism for mortgages, seemingly a much larger market. It’s arguable that subsidies and price support programs in the US are larger than in China. This is done “democratically” (or rather, through strong special interest group pressure) but US Presidents have just as much power to institute such programs as the CCP.

    “So the Chinese are probably limited by their ability to absorb the stuff that they are buying with their dollars.”

    Pretty much anything can be bought in dollars, and human wants are virtually unlimited, so if China wanted to they could change their dollars for real goods at any moment.

    “As their country becomes more connected, that ability to absorb stuff goes up and they will be able to spend dollars faster which will decrease the dollar’s value in the world market but not result in much inflation in China or, for that matter, in the US.”

    If it wouldn’t result in much inflation in the US (or higher interest rates), why is there so much speculation that the Fannie & Freddie bailout was made not only to bail out most large financial institutions but was a reaction to pressure from other central banks holding massive amounts of their debt and mortgage backed bonds? The implicit message being – if you don’t bail these companies out, we will sell treasuries en mass, causing a big drop in the dollar and a large increase in interest rates. See: Foreign Bondholders Drove The Fannie/Freddie Bailout.

    A book like _Economics in One Lesson_ shows why it’s not in the interests of China’s people to subsidize oil or food products (although since the government already intervened by siphoning off so much money it is better to spend it than not and to stop accumulating new dollars), and does a far better job than I could presenting said arguments.

  13. Jeremy’s blog has a post comparing freedom in America and China, which is remarkably flip and unserious [1]. Jeremy totally ignores the lack of an independent judiciary, the radically corrupt police force, guanxi networking, or any of the serious social ills hosted by China.

    I think all those who love China hope that the Central Committee does not look at reality with the same rose-colored glasses. Real problems deserve real solutions — not baseless comparison to a structurally different (and superior) economy.

    [1] http://www.thechinaexpat.com/is-china-freer-than-america/

  14. Jeremy

    I don’t call the government of China communist because they subsidize gasoline but because 1) they call themselves communists 2) the current government traces its origins back to the communists party that originated early in the 20th century, fought the KMT, made the long march, won control of China in 1949 3) they encourage their school children to sing songs like “Mei you Gongchangdang, mei you xin Zhongguo”. If you prefer, you can refer to the Chinese government as fascist, since I think that is a better description of their current policies, but I was being polite in referring to the Chinese by the name they prefer.

    If it were up to the Chinese people, they would probably spend most of the dollar reserves and buy consumer goods for themselves. However in communist and fascist countries, those decisions are made by an elite who are unaccountable to the Chinese people, although they apparently wish to avoid any more unpleasantness like the Tienanmen Square demonstrations of 1989. The people in charge of China are not interested in democracy but on maintaining their own positions and (in the best traditions of the Confucian mandrins) giving the Chinese people what they need rather than what they want.

    Why is there speculation over the method and timing of the Freddy and Fanny takeover? Why did Andrew Sullivan keep speculating that Bristol Palin was the actual mother of four month old Trig Palin even after it was revealed that Bristol Palin was five months pregnant? Writers under deadline pressure have to write something. What they write doesn’t have to be true.

    You, Henry Hazlitt and Milton Friedman might agree that it is not in the interest of China’s people to subsidize oil and food products but the people running China do not seem to agree. Although they are no longer devoted to Marxist or Maoist economics, they are not quite ready for libertarian laissez faire economics either.

  15. Hi tdaxp – You’re right that I was very glib about China’s political freedoms, but nowhere did I claim that China is more free in this regard. And you weren’t responding to anything above but to something els I wrote elsewhere.

    The level of corruption / guanxi / police power & independent courts varies tremendously depending on where in China you are talking about – the areas leading the country in growth are much less corrupt, guanxi driven, and have fairer courts than elsewhere.

    I’d be careful claiming that the US economy is structurally superior to China’s economy as the results of 30 years of credit expansion / increasing debt show its true color.

    The major factors driving the unravelling of the US economy – insane mortgages and banking practices and government bailing out of huge financial insititutions, did not exist and does not exist (though the banking system is still mostly nationalized, China’s central bank has not had to pump tons of money into the system as far as I can tell) – as the housing market went up here, the downpayment requirement went up to 50% and lending was curtailed before a downturn had set in.

    If you think these are temporary problems that will soon pass, you may be unaware of the Alt-A resets from ’09-’12 (a problem bigger in scope than Subprime, resets of which are just now peaking) or how serious the consequences will be for bailing out Fannie & Freddie (and to a much lesser extent Bear Stearns and now AIG, with more financial institutions to likely follow given the extent of unrealized and unaccounted for future losses sitting on the books of almost every major US financial insitution)

    Hi Mark – Milton Friedman would agree about the oil subsidies and food subsidies, but he is no libertarian laissez faire economist, not when he believes in quasi-government control and manipulation of money through the Federal Reserve.

    Personally I see the US as moving toward fascism and China slowly moving away from it, but that’s just the view here. Not sure when they will cross paths.

  16. Jeremy,

    Thank you for your comment.

    While China’s rise to a relatively transparent society is impressive (a bit above Georgia, a bit below Ghana), it still suffers compared to more developed American, European, and Asian nations [1]. Reporting of the often theoretical difference between organized crime and industrial tycoons, not to between mention regulators and competitors, are well established. [2]

    Your point on Chinese mortgages is important. While the US is currently suffering the consequences of attempting to extend historic home ownership rates [3], China’s mortgage system is basically non-existent. That is, the worst possible outcomes that could theoretically strike the US mortage system is the status quo in China.

    Your construction of the Milton Friedman sentence is odd. Your point seems to be defend what passes for welfare policies in China against a nonexistent strawman of radical libertarianism. This seems both clumsy and pointless.

    [1] http://www.transparency.org/policy_research/surveys_indices/cpi/2007
    [2] http://www.amazon.com/One-Billion-Customers-Lessons-Business/dp/0743258398
    [3] http://www.takimag.com/site/article/the_diversity_recession_or_how_affirmative_action_helped_cause_the_housing/

  17. Hi tdaxp,

    I don’t endorse China’s control of the banking sector or determining what percentage should be made as a downpayment. However, when a central bank allows a massive expansion of credit (the cause of the US housing bubble, and China’s stock and housing bubbles), it is better to have regulation than not, in this case escalating mortgage requirements.

    Your assertion that China’s mortgage system is non-existant has no basis in reality, at least from my experience. Anyone with a downpayment and a decent paying job can apply for a mortgage in China. And before the bubble downpayments were low – 10%. That can hardly be called a non-existant mortgage system.

    Yes, China’s banks are controlled by the government – but now the difference between the two systems (referring only to mortgages here) has become nonexistant – Fannie & Freddie originated 80% of mortgages in 2007, now they are being nationalized, and after they pursued policies that will result in massive losses to taxpayers (either through taxes or inflation). You could argue that such a system is worse than China’s, as the ‘gains’ were privatized and now the losses are being nationalized.

    If you mean that there is no mortgage securitization process in China, you’re probably right (I don’t know) – but given the experience in America, it seems that it’s better for those that create the mortgages be directly responsible for any profits or losses they incur.

    Again, the US is suffering the consequences of a massive credit bubble – the only reason that housing problems have been much more serious among lower income housing thus far is because of the type of mortgages said housing was bought with (Subprime), resets of which are peaking now. The problems will be just as severe across all income levels as Alt-A mortgages (toxic mortgages taken by people with higher incomes and higher credit scores) begin to reset en masse from 2009-2012. (see this chart, though I don’t agree that the Fed’s actions ‘reduced’ subprime problems, they merely passed them from the financial sector to everyone)

    You’re absolutely right that your linked lending programs only aggravated the bubble, I just want to point out that the problems are far from concentrated in borrowers who took out subprime mortgages.

  18. Jeremy,

    Thanks for your comment.

    I don’t endorse China’s control of the banking sector or determining what percentage should be made as a downpayment. However, when a central bank allows a massive expansion of credit (the cause of the US housing bubble, and China’s stock and housing bubbles), it is better to have regulation than not, in this case escalating mortgage requirements.

    You’re lumping what amounts to the destruction fo the mortgage industry in China (removing most risk, by allowing only those who collateral in the investment is at least equal to the amount they are borrowing) to regulations, as they generally occur in developed countries. I don’t know if this is a good move for China or nto — the country has a primitive and barely functioning personal savings sector, so it may be wise.

    Your assertion that China’s mortgage system is non-existant has no basis in reality, at least from my experience. Anyone with a downpayment and a decent paying job can apply for a mortgage in China. And before the bubble downpayments were low – 10%. That can hardly be called a non-existant mortgage system.

    You say it exists, and then assert that it used to exist. This is hardly a defense.

    One might as well imagine a country that bans loans in excess of the savings someone puts in a bank, and then argue that such a country has a functioning personal credit industry.

    Your point on government collusion in the running of financial institutiosn is important. It overlooks the financial firewalls that China have built up to prevent its financial sector from having to face discipline from the world financial market. Again, such coddling may be wise in a country with a developing and primitive structure based on low-wage labor and low-quality manufacturing.

    The recent credit bubble in US home values is definitely something to deal with. The US is fortunate that it does not have to destroy a sector of its financial sector to deal with such a bubble, as China had to. The creative destruction such bubbles creates is an important method for modernizing an economy, at least in countries that can handle the flow.

    You didn’t address either China’s massive corruption or the strange phenomenon of regulators who are competitors in the marketplace.

  19. Hi Tdaxp,

    You’re not addressing America’s massive corruption, in plain sight with the $800+ billion bailout and $1 trillion in liquidity and smaller bailouts the Federal Reserve has provided over the past year.

    The only reason the financial sector has not been destroyed in America is because of the massive government (and semi-private central bank) intervention taking place before our eyes.

    So I’d say you’ve got you’re statement backwards – China saved their banking system by not allowing such lax lending standards and America destroyed theirs by allowing them. That’s not quite accurate in my mind (it wasn’t the elimination that is doing the financial sector in so much as the massive credit expansion by the Federal Reserve over the past 15 years), but is a good counter point.

    I was wrong about there being much credit available for Chinese borrowers who wanted to buy homes – the reason I wrote this response is to link to this article at the China Vortex which claims that even without the extension of lots of credit for home mortgages, China has a higher rate of homeownership:

    http://www.chinavortex.com/2008/10/understanding-global-financial-crisis/

    You’d have to ask him where he got this information about homeownership levels in China, though.

  20. Jeremy,

    Thank you for your comment.

    You’re not addressing America’s massive corruption, in plain sight with the $800+ billion bailout and $1 trillion in liquidity and smaller bailouts the Federal Reserve has provided over the past year.

    The only reason the financial sector has not been destroyed in America is because of the massive government (and semi-private central bank) intervention taking place before our eyes.

    Indeed, the Bush-Pelosi bail-out threatened to be a give-away to bankers, though it appears that our use of a the Swedish-British model may help prevent this.

    It is notable that the degree of US interference in the financial markets (as both a regulator and a competitor across large swaths of the market) , during a once-in-a-century crisis, is comparable to how China’s financial market works on a daily basis.

    So I’d say you’ve got you’re statement backwards – China saved their banking system by not allowing such lax lending standards and America destroyed theirs by allowing them. That’s not quite accurate in my mind (it wasn’t the elimination that is doing the financial sector in so much as the massive credit expansion by the Federal Reserve over the past 15 years), but is a good counter point.

    Certainly the excess of wealth in the current global system is a good problem to have! From historic high savings rates throughout Asia, to the federal reserve’s ability to combine low inflation with low interest rates, this is an economic environment we need to adjust to.

    That said, saying that China’s non-existant mortage market is a better model for mortage markets would be like, say, praising the podered milk industry in Zambia for avoiding the sort of problems China’s powdered milk industry has. Of course, the comparison is nonsensical: Zambia is too industrially underdeveloped to have the ability to meaningfully adjust their powdered milk factories, as China is too financially underdeveloped to have the ability meaningfully to adjust their mortage markets.

    I was wrong about there being much credit available for Chinese borrowers who wanted to buy homes – the reason I wrote this response is to link to this article at the China Vortex which claims that even without the extension of lots of credit for home mortgages, China has a higher rate of homeownership:

    http://www.chinavortex.com/2008/10/understanding-global-financial-crisis/

    You’d have to ask him where he got this information about homeownership levels in China, though.

    Vortex’s claim is absurd, as China’s large peasant population do not own their own homes or land: they essentially live in ‘company housing.’ This is changing, and is part of China’s historic process of liberalization. Still, Vortex’s statement is nonsensical.

    [1] http://www.nytimes.com/2008/10/11/world/asia/11china.html?ref=world

  21. Thanks for that article from the NYT – it’s interesting and of course it would be great for such reforms to go through.

    “Certainly the excess of wealth in the current global system is a good problem to have! From historic high savings rates throughout Asia, to the federal reserve’s ability to combine low inflation with low interest rates, this is an economic environment we need to adjust to.”

    High savings rates abroad and additional wealth creation / freer trade / freer markets are definitely pluses.

    I don’t think the Federal Reserve has created low inflation – for one thing, measures of inflation are severely under-reported in comparison to the methods used by our own gov’t 20-30 years ago (see shadowstats.com).

    For another, much of that inflation has been exported to other countries in the form of US dollar denominated debt – $5 trillion or so of which is floating around outside of the US.

    When that paper is traded for real goods (which will happen just as soon as enough people realize that the US is choosing inflation as the solution to problems created by inflation and that it won’t work), prices will rise in dollars.

    For another, defining inflation as the rise in prices instead of the rise of the money supply hides the effects of what I’d call true inflation. During the roaring 20s we also had almost zero price inflation, but it concealed a large monetary inflation (reflected largely in the stock and housing markets). That same monetary inflation is what caused the malinvestment which brought about the onset of the Great Depression (as _America’s Great Depression_ shows, it was much greater government intervention in all kinds of markets that deepened and prolonged the downturn, first under Hoover and then Roosevelt)

    We have very different narratives of what is happening in the world today playing in our heads – you think that the Federal Reserve has within its power to create low interest rates combined with low inflation. I think that it is these same low interest rates that mask the underlying monetary inflation and setoff malinvestment on a large scale that must be corrected through recessions – and that we would be much better off without a central bank.

    All I can say is that I used to think in the same terms as you did, but a bunch of reading changed my mind entirely – especially a book called Money, Bank Credit, and Economic Cyles by Jesus Huerta de Soto translated in 2006 – which is the most comprehensive work on Austrian business cycle theory and other monetary theories (in general and throughout thousands of years of history) I know of. I’d highly recommend it – you have nothing to lose by reading it and considering its arguments, except time.

    I’m open to any suggestions as well – although I long ago read MF’s A Monetary History of The United States (I’m assuming many of your views are close to those of the Chicago schools from your blog & comments).

  22. Jeremy,

    For another, defining inflation as the rise in prices instead of the rise of the money supply hides the effects of what I’d call true inflation.

    Agreed. I recently was involved in a heated discussion over at Fabius Maximus’ blog, making exactly the same point. An increase in prices is not inflationary if it reflects real increased costs.

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