Partner Center Find a Broker

"The fool doth think he is wise, but the wise man knows himself to be a fool". –
                                          Shakespeare, As you like it (Act V, Scene I).

Commentary & Analysis
Dismal Science is an understatement:
Why Irving Fischer had it right all along!

Jim Grant, editor of Grant’s Interest Rate Observer, is an articulate and brilliant person. His ability to sum up economic events of the day in his entertaining and succinct manner is proof of his depth. The Wall Street Journal recently devoted its weekend interview section to Mr. Grant. It is aptly titled, “The Scourge of the Faith-Based Paper Dollar.” There are many great pithy comments shared by Mr. Grant, my favorite was this one:

“At the margin people are registering dissent from the judgment of central bankers by bidding up the price of gold.”

Bingo! Right on Jim!

Last week I touched on this key point in my missive “More nanny-state happy juice? Seriously, Ben.” The key point was that neither Ben nor his bodies recognize we are mired in an environment defined by Fishers Debt-Deflation Theory. This is no small point, for this lack of recognition has led to policies that have not only wasted precious money and time, but has also made things much worse.

Other than the Fed, in playing a strong supporting role in making our economy worse off was the small in stature and huge in ego, Mr. Larry Summers. What is truly farcical about all this is the fact that Larry is still sharing his disastrous policy advice with others, fresh off his stint doing all he could to complete screw up the US economy while czar. Through an editorial carried (I don’t know why) by the Financial Times on Monday, Mr. Summers proceeded to tell eurozone leaders exactly how to fix the problems of the eurozone. I told John Ross that represents chutzpah to the third power. John Ross responded with this:

I loved reading through all of Summers’ academic terms and phrases to make him sound credible, and then the last paragraph really boiled it down to his main intent…some form of collectivism, globalist BS.

This is the type of thing Larry does best; spout theories and ideas, but takes no responsibility when they fail miserably in the market place, as they do. The only other left liberal US “economists” who might be able to match Larry’s chutzpah and ability to get almost everything in the real world completely wrong would be Paul Krugman and Robert Reich. But Larry being closer to the reins of power is much more dangerous. No matter that their advice is nonsensical, Krugman and Reich continue to be published and interviewed on a regular basis. And we wonder why they call it the Dismal Science.

Is there one person out there in the world of economics who has gotten it consistently right for a very long time? Yes. And there may be more than one. But the one I like most is Lacy Hunt. He toils away at Hoisington Investment Management in Houston, Texas. For anyone who is still laboring under the false illusion that stimulus is the proper policy idea for fiscal and monetary mavens, the second-quarter economic summary written by Lacy Hunt and Van Hoisington is a must read.

The key point made is the Fed has misunderstood the environment–we are in a Fisher defined debt-deflation environment, as I defined last week; Mr. Hunt and Hoisington have done it so much better than I could have [my emphasis]:

The three competing theories for economic contractions are: 1) the Keynesian, 2) the Friedmanite, and 3) the Fisherian. The Keynesian view is that normal economic contractions are caused by an insufficiency of aggregate demand (or total spending). This problem is to be solved by deficit spending. The Friedmanite view, one shared by our current Federal Reserve Chairman, is that protracted economic slumps are also caused by an insufficiency of aggregate demand, but are preventable or ameliorated by increasing the money stock. Both economic theories are consistent with the widely-held view that the economy experiences three to seven years of growth, followed by one to two years of decline. The slumps are worrisome, but not too daunting since two years lapse fairly quickly and then the economy is off to the races again. This normal business cycle framework has been the standard since World War II until now.

The Fisherian theory is that an excessive buildup of debt relative to GDP is the key factor in causing major contractions, as opposed to the typical business cycle slumps. Only a time consuming and difficult process of deleveraging corrects this economic circumstance. Symptoms of the excessive indebtedness are: weakness in aggregate demand; slow money growth; falling velocity; sustained underperformance of the labor markets; low levels of confidence; and possibly even a decline in the birth rate and household formation. In other words, the normal business cycle models of the Keynesian and Friedmanite theories are overwhelmed in such extreme, overindebted situations.

Now correct me if I am wrong: Do you need to be an economist to recognize the symptoms defined by Fischer almost perfectly fit with the reality of the US economy? Of course the answer is no. So why do so-called economists keep missing this point?

Economists are aware of Fisher’s views, but until the onset of the present economic circumstances they have been largely ignored, even though Friedman called Irving Fisher “America’s greatest economist.” Part of that oversight results from the fact that Fisher’s position was not spelled out in one complete work. The bulk of his ideas are reflected in an article and book written in 1933, but he made important revisions in a series of letters later written to FDR, which currently reside in the Presidential Library at Hyde Park. In 1933, Fisher held out some hope that fiscal policy might be helpful in dealing with excessive debt, but within several years he had completely rejected the Keynesian view. By 1940, Fisher had firmly stated to FDR in several letters that government spending of borrowed funds was counterproductive to stimulating economic growth. Significantly, by 2011, Fisher’s seven decade-old ideas have been supported by thorough, comprehensive and robust econometric and empirical analysis. It is now evident that the actions of monetary and fiscal authorities since 2008 have made economic conditions worse, just as Fisher suggested. In other words, we are painfully re-learning a lesson that a truly great economist gave us a road map to avoid.

Hunt and Van Hoisington go on to document and explode every myth that would hint that stimulus is helpful and prove it has been disastrous for our economy. Bernanke and the US government stimulus team have done us a terrible disservice, yet have the gall to continue to espouse these failed policies. I strongly recommend you read this entire piece and decide for yourself.

Last week I quoted from the late great Austrian School economist Ludwig von Mises, whose books I started digesting over thirty years ago, he said: “The issue is always the same: the government or the market. There is no third solution.” Messer’s Hunt and Van Hoisington’s summary dovetails on this…

In the broadest sense, monetary and fiscal policies have failed because government financial transactions are not the key to prosperity. Instead, the economic well-being of a country is determined by the creativity, inventiveness and hard work of its households and individuals.

I think now you know why I like Lacy Hunt so much.