I love reading the normally good blog posts on freebanking.org written by clever economists such as George Selgin and Kurt Schuler. However, the Facebook page of freebanking.org very often fails to live up to the same good standards as the blog. In fact most updates are what I consider to be internet-Austrian nonsense.
Here is the latest example:
“If the dollar were suddenly to lose reserve status, the United States of America would face catastrophic inflation.”
The freebanking facebook page is quoting an article by Lawrence J. Fedewa. I have never heard about him before, but his article is a pretty good example of the kind of “the-world-is-coming-to-an-end” nonsense, which is floating around in cyberspace mostly written by tin foil hat Austrians.
But let me address the quote above.
First of all there are no signs that the dollar in any way is loosing its reserve status. In fact the dollar is more popular than ever. Hence, since the onset of the crisis in 2008 we have seen a massive increase in dollar demand – in fact that was what caused the crisis.
Or just ask yourself what currency is about to replace the dollar as the reserve currency of the world? The euro? I think not? Or the yuan? Think again you silly people.
I am presently vacationing in Thailand and I am pretty sure that if I wanted to pay any local street vendor here with dollars they would be very happy to accept it. But would they accept euros? Probably – there is a lot of German tourists in the area where we are vacationing so the locals are probably familiar with the euro.
But what if I tried to pay with yuan? I doubt the street vendors would accept that. So no the verdict is pretty clear from the Thai street vendors – the US greenback is what they prefer to any other currency (I nonetheless pays in Thai baht).
But lets get back to some more silliness. This is again from Fedewa’s article:
If the dollar were suddenly to lose reserve status, the United States of America would face catastrophic inflation. All the dollars that the Federal Reserve has been creating, at about $85 billion each month, would begin to be dumped right on our heads, and the dollar would become virtually worthless. A loaf of bread could cost $50, a basket of groceries could cost $500. Hyperinflation has happened to many nations, including post WWI Germany, France and Russia, and modern day Greece and Spain.
Note here this is the trick used by the internet-Austrians – “It might be that we do not have hyperinflation yet but it will comes once dollar demand collapses”. Fine, first of all there is unfortunately no real sign that dollar demand is declining and money-velocity in the US is still quite elevated.
Second, if dollar demand where to start declining it would be good news as it would mean that the world would becoming “normal” again. That the excessive demand for dollars driven by deflation fears were easing. That obviously would increase inflationary pressures. And that should be welcomed – after all there is still significant slack in the US economy and inflation continues to be way below the Federal Reserve’s semi-official inflation inflation of 2% and the reason the fed has had to massively expand its balance sheet is exactly the massive demand for dollars.
But ok lets say that out of the blue everybody suddenly did not want to hold US dollars – I still fail to see why that would be the case, but lets for the sake of the argument assume that to be the case. A collapse in dollar demand would of course effectively be massive US monetary easing. The impact of this would likely be a sharp increase in both real and nominal GDP – and inflation.
Would the Fed be helpless in this situation? No not at all. The Fed of course could just tighten monetary policy. It could of course easily shift quantitative easing into reverse by for example announcing that if would cut the money base by 100 or 200bn dollars per months until inflation expectations returned to (just) below 2% and given the fact that the Fed’s balance sheet has never been bigger it could cut the money base a lot. There is not limits to how easing or tightening a central bank can do. Only paleo Keynesians and tin foil Austrians fail to understand this.
It is too bad that there is so much nonsense about monetary policy floating around in cyberspace, but it is unfortunately only getting worse and worse. I don’t know why this is and these views have probably always been around, but I for one is sick and tired of listening to all is nonsense!
And finally, the US government is not about to default. The crackpots on the left are wrong when the claim that the US government would have to default had the debt ceiling not been raised (the US government could just have cut spending) and the crackpots on the right are wrong when they claim that the US government debt is out of control (the budget deficit is declining strongly and public debt levels have stabilized).
But of course that financial markets know that all this is just political hype in Washington. Just look at the S&P500 – it has gone up all though this show of US political dysfunctionality. Why? Because monetary policy dominates fiscal policy. It is the Sumner Critique stupid!
And now back to my vacation…
PS I have no clue whether Fedewa considers himself to be an Austrian. I use the term tin foil hat Austrian to describe a tendency or type of argument used by so many commentators rather than by people who actually read von Mises and Hayek. By the way I bet most of the people in cyberspace making what they believe to be “Austrian” arguments actually found these arguments on Youtube rather than by reading “Human Action” and other must-read Austrian classics. What I don’t understand is why Austrian scholars who actually did study von Mises and Hayek are not coming out much more aggressively and tell people like Peter Schiff that his arguments are nonsense. I would love to see a debate between for example Steve Horwitz and Peter Schiff.
PPS I just came to think of the Austrian version of Godwin’s law. Godwin’s law states that “As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1.” The Austrian version of this should read: “As an online discussion about monetary policy grows longer, the probability that an Austrian will mention Zimbabwe or the Weimar Republic approaches 1.”
George Selgin
/ October 19, 2013It’s good that you have drawn attention to this, Lars. I, for one, have nothing to do with the Facebook page of freebanking.org, and would rather not be associated with such ideas as the one you properly disparage here.
Lawrence H. White
/ October 19, 2013The Fedewa article is indeed silly for the reasons you spell out, and for that reason it is regrettable that it was linked to (even without comment) by the administrator of the Facebook page associated with our Free Banking blog. But as you acknowledge, you “have no clue whether Fedewa considers himself to be an Austrian.” Nothing in his argument is Austrian. So I’m disappointed that you casually besmirch the reputation of Austrian economics in the title of your blog post, in the way Brad DeLong might. Your title should rather have been “More internet silliness.”
Lars Christensen
/ October 19, 2013Larry, my title explicitly uses the term “Tin Foil Hat Austrian” rather than Austrian.
My view is exactly that the kind of views flying around the internet is often said to be “Austrian” even though both of us know that a lot of these views are certainly not Austrian in the sense of Mises or Hayek (or even Rothbard for that matter).
I think there is a significant need for Austrians and those of us with strong sympathies for the Austrian school to speak out against the craziness which is often termed “Austrian” in cyberspace.
Could my headline have been different? Yes, maybe but it is certain that my intention was not to besmirch the reputation of Austrian economics – which I to a large extent am a follower of myself.
Jim Caton
/ October 20, 2013Lars,
I respect your work, which is why I follow your blog. I understand your point, but many can’t and others simply don’t distinguish between “Tin Foil Hat Austrians” and academic Austrians. I’d never ask that you change the title, but I think it is certainly confusing to those who do not pay close attention to the literature and gives ammo to those who largely ignore the literature.
Petar Sisko
/ October 19, 2013recently another article was linked, that stated that monetary base was the “broadest money measure”.
Feels as some angry internet rothbardian is administrating the page sometimes.
Greets
Gordon
/ October 20, 2013I don’t blame the real Austrians such as Selgin or White for not wanting to debate or inform these people. The faith that most people have in their secular viewpoints is as strong as the faith that they have in their religious viewpoints. Also, look at it from the standpoint of incentives. Many of these people probably like the feeling that they’re part of a group (or the sole person) that is in the right whereas the majority is wrong. This gives them a feeling of superiority and that’s of more value to them than the value they place on having a viewpoint that’s backed by data and achieved through careful, logical, and objective consideration. Therefore, they have little incentive to give other viewpoints a fair hearing.
Under the circumstances, trying to debate or inform them would be a horrendous waste of time.
Lars Christensen
/ October 20, 2013Jim,
Thanks for the comments. I think this is exactly my point – many will have a problem differentiating between serious academic Austrian economists and the kind of crackpots who also happens to call themselves Austrians.
As you know I am not out to badmouth the “real” Austrians. In fact I have always wanted to promote good Austrian ideas and I certainly myself is very inspired by Austrian thinking – probably more than any other Market Monetarist.
But to protect the “Austrian” brand I think serious Austrian economists need to speak out against the craziness that we so often encounter in cyberspace.
Morgan Warstler
/ October 24, 2013The truth of the thing is that MM is 10X more in league with the gold bugs, than any Keynesian and you should stop trying impress those who will never ever love you. That’s a sickness.
Just get over “gold bug” – they are just small govt. guys who don’t grasp econ as well as you do.. YOU are a small govt. guy who just grasps econ better than they do. If you aren’t a small govt. guy MM doesn’t have much for you except text book economics.
Scott’s doing the tour of gold bugs precisely for this reason.
The difference between gold bugs and dirty hippies, is that gold bugs worked for their money, as a class of people they are better to do business with, attend church with, send your kids to school with their kids, etc.
I see nothing in picking fights with your compatriots.
Tom Brown
/ October 24, 2013Morgan, I don’t care about small gov, but I’m intrigued by MM. I don’t think I’m alone. Plus I have no use for church.
Tom Brown
/ October 24, 2013… well lets say I think small gov is a nice extra (like an added flourish in a well done magic trick), but it’s far from my primary concern. I’m much more interested in stability, broad opportunity, technological advancement and economic growth. An efficient, fair meritocracy is the ideal for me. I’m open to the small gov argument, but repulsed when it smells like a faith based argument. I’m not a faith guy: faith is not a virtue: it’s a coping mechanism when there’s a lack of evidence. More important concerns should not be sacrificed because small gov has become a priority in itself. Again I don’t think I’m alone here… it may be easier to win over folks like me.
Tom Brown
/ October 24, 2013Lars, first time commenter here (I think.. I don’t recall commenting here before). What do you think of this video which is becoming quite popular?:
https://www.youtube.com/watch?v=iFDe5kUUyT0#t=54
Tin-foil hat stuff? How long did you last? 30 seconds? 5 minutes?
Tom Brown
/ October 24, 2013How about this one?:
http://howfiatdies.blogspot.com/2013/10/forbes-article-on-hyperinflation.html
George Selgin
/ October 24, 2013Yes, the video is mostly tin foil stuff–albeit very slick tin foil stuff. The nonsense in it is made all the more dangerous because some truth is blended in as well.
And I made it through the whole thing, though it pained me to do so.
Tom Brown
/ October 24, 2013George, thanks very much for you review.
Daniel Musashi
/ October 25, 2013Since I am not very well educated regarding this topic, I would be very interested to know what is truthful and what is not about this video. Especially since this video is so popular, it would be useful to have some sort of response video or article debunking it’s misleading assertions.
Vincent Cate
/ October 25, 2013Lars, or anyone, what do you think of my Hyperinflation FAQ? Tin foil or solid stuff?
http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html
Benjamin Cole
/ October 28, 2013The Internet is wild and wooly and there are tin foil hats galore (mine is aluminum foil, btw).
But…there are also “serious” papers out there, published by branches of the United States Federal Reserve (I think that is serious), to the effect that even much larger amounts of large scale asset purchases (LSAP) would have little effect on output or prices…leading to the question: Why don’t we do it? Why don’t we wipe out the national debt?
I salute the Fed with my aluminum foil hat—those Fed guys are wearing lead helmets…
http://thefaintofheart.wordpress.com/2013/10/25/st-louis-fed-u-s-national-debt-can-be-wiped-out-in-a-few-years-by-qe-and-inflation-reduced/
fun read btw
Lars–I am in Korat…enjoy your vacation….
Benjamin
Vincent Cate
/ December 9, 2013I have many different explanations for how hyperinflation works using many different theories. However, I don’t have an explanation based on market monetarist theory. Can anyone tell me if you agree with one of my existing explanations or can someone provide a new explanation?
http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html