It really gets irritating to see so many people saying that Austrian Economists reject empirical data or that the data are at odds with what they believe. It seems to me that, if you have a science that works you should be able to make predictions. Who is it that has a method by which true predictions can be made? Art Laffer? No. It's the Austrians. I've transcribed a few interviews and speeches of people whom have studied Austrian economics, and were bold enough to make some predictions. Here's one: From MSNBC August 28, 2006 Host: Why do you think a recession is comming, and just how bad is it going to be? Peter Schiff: I think it's gonna be pretty bad, and whether it starts in '07 or '08 is immaterial, and I also think it's gonna last, not just for quarters, but for years. See, the basic problem with the US economy is that we have too much consumption and borowing, and not enough production and savings. And what's gonna happen is the American consumer is basicaly going to stop consuming and start rebuilding his savings esspecially when he sees his home equity evaporate. And, when you have the economy seventy percent consumption, you can't addresss those imbalances without a recession. You know, rather than the recession being resisted, it should really be embraced, because the desease is all this debt financed consumption. Host: humph Peter Schiff: The cure is that we stop consuming and start saving and proucing again, and that's a recession. And sometimes, you know, medcine tastes bad, but you gotta swallow it. Host: Alright, Art Laffer, you hear him? He says the consumer is gonna slow down in order to rebuild the savings. And you know that two thirds of the American economy is driven by the consumer. Do you believe that? Arthur Laffer: No, I don't believe any of it whatsoever, Michelle. Excuse me but, you know, What he's saying is that saving is way down in this country, but wealth has risen dramatically. The united states economy has never been in better shape. There is no tax increase comming in the next couple of years. Monitary policy is spectacular. We have freer trade than ever before. And, not only that, but there are no incomes policies [inaudable (things here)?]. I think peter is just totally off base. And I don't think it's gonna be... I mean I just don't know where he's getting his stuff. The savings ra/ Peter Schiff: Well one of us is off base, but it's deffinitly not me. I mean, it's not wealth that has increased in the last few years. We haven't increased our productive capacity. All that's increased is the paper value of our stocks and realestate. But that's not real wealth/ Arthur Laffer: Of course it is! Peter Schiff: no more than the nasdaq was wealth. When you see the stock market come down and the realestate bubble burst, all that phony wealth is gonna evaporate. And all that's gonna be left is all the debt that we accumulated to forighners/ Arthur laffer [These are not typos, but were his actual words]: Peter, I wanna make a bet with you on this one. I'll bet you a penny on this one that, if you'll sign a letter saying that if you're wrong, you'll you'll sign a letter that you were wrong to me on this but you're just way off base. There is nothing out there that tells us we're gonna have a nice slow down but it's not gonna be a cras/ Host: Alright, alright, let me ask you this. Alota folks out there point... [inauable] Peter Schiff: I'll bet you more than a penny.
Austrian economics is specifically tailored towards predicting financial bubbles. While not quantitative in nature (it is certainly empirical in nature), the way to predict financial bubbles outside of financial economic models, complexity theory analysis, imperfect knowledge economic analysis, all coupled with behavioral economic analysis is based upon simple economic characteristics. In the case of general economic phenomena, these characteristics are moral hazard and exorbitant liquidity. However, these identified phenomena cannot be exclusively attributed to Austrian economists. Nouriel Roubini, a New Keynesian economist, used the same basic economic phenomena in accordance with neoclassical economic analysis to correctly predict the crash of the housing bubble and subsequent events, including the recession, in 2006.
So a New Keynesian knew about the housing bubble while everyone else was saying that housing prices never go down? Somehow that's comforting to learn, in a strange way. I'm struggling to understand everything else you wrote here. Would you flesh it out a bit for me?
I will skip over the various economic schools of thought I cited. They are of little relevance to the two economic characteristics at hand, exorbitant liquidity and moral hazard. Moral hazard is the taking on of undue risk because the party at risk is not oneself. For example, during lead-up to the the financial crisis, because most financial institutions were "too big to fail", tremendous counter-party risk was put on the federal government. To rephrase 'liquidity' to better frame the lead-up to the financial crisis, the term refers to the ability of an asset to be sold with little loss of value or significant movement in the price. During the financial crisis, liquidity was thin. Assets, if sold, would lose significant value and there would be significant price movements. Put this along with moral hazard in regards to the last bubble and financial crisis, and you one can see that there was a risk of collapse due to the lack of liquidity as a result of leverage and taking on of debt by the financial sector, as well as moral hazard due to leverage and securitization, which spread risk to many different parts of the economy, but also established "too big to fail".
Schiff was predicting a sever recession and stock collapse back in 2002, and was predicting we'd have hyperinflation and $5000/oz gold by now. I'm sure you can find a more accurate prognosticator than Schiff. == 2002 Schiff predicts a severe bear market in the next couple years, with substantial inflation, the Nasdaq going to 500 and the Dow 2000 to 4000, and maybe below 2000. http://seekingalpha.com/article/1068...hiff-right-now 2005 "The big, big story of 2005 could be the collapse of the dollar." -- Peter Schiff, founder of Euro Pacific Capital in Newport Beach, Calif., Jan. 2, 2005 2008 $2000 gold in 2009: Peter Schiff Predicts $2,000 Gold in 2009 http://www.goldstockbull.com/articles/peter-schiff-predicts-2000-gold-in-2009/ Oct 2008: In the end, by refusing to allow market forces to work their cure, our economy will inevitably die from the disease. Our economy will now face death by hyperinflation, which will cause a complete loss of confidence in the dollar and result in prices and interest rates skyrocketing out of sight. The evaporation of our national wealth will lead to civil unrest, food and energy shortages, and the possible imposition of marshal law. If such a scenario unfolds, what is left of our Constitution will surely be completely shredded. http://www.europac.net/newsletter/newsletter15.htm#shiff 2009 2/6/09 Peter Schiff: Stimulus Bill Will Lead to "Unmitigated Disaster" The fiscal stimulus bill being debated in Congress not only won't help the economy, it will make the recession much worse, says Peter Schiff, president of Euro Pacific Capital. ... The problem, he says, is the government is trying to perpetuate a "phony economy" based on borrowing and spending. With the U.S. consumer tapped out, the government is "now taking on the mantle" of consumer of last resort, he continues, predicting the bond bubble will soon burst - if it hasn't already - ultimately leading to a collapse of the dollar and an "inflationary depression worse than anything any of us have ever seen." 9/25/09 Dow 9748 1:40 The worst is not over, according to Euro Pacific Capital's Schiff, who predicts the Dow will fall another 90% from current levels when measured against gold, rade at a one to one ratio with gold, and that gold will hit $5000/oz in the next several years. http://finance.yahoo.com/tech-ticker/article/342802/Peter-Schiff-U.S.-Rally-Is-Doomed-Gold-Will-Hit-5000?tickers=^DJI,GLD,EPHCX,FXI,EEM,GDX,^GSPC http://www.youtube.com/watch?v=NHzfslWYYO4
Peter Schiff understood the housing crash... he was wrong about every affect the housing crash would have on the monetary system. Actually his 4 main investment points in anticipation of the crash were all completely wrong.
We all know about Ron Paul's predictions of the housing bubble as far back as 2002. Guess who predicted the 1929 depression. From Ludwig Von Mises in 1928
You're exaggerating. "I wouldn't be surprised to see it at $5000 over the next several years" is not the same as "we will have $5000/oz gold by x date". At least he was right about the direction things would go.
Austrians more or less are correct in regards to the directions markets will go. The specifics, not so much. Roubini's prediction in regards to the collapse of the housing bubble and subsequent recession was much more accurate than Schiff's or Paul's. Mises analysis of the Great Depression was correct in the general sense, but on the specifics, he was not as accurate.
Well that's right. But then, Mises' predictions weren't very specific. And you wouldn't expect them to be, since he didn't believe that many specific predictions could be made, in principal.
I agree. Understanding the intellectual capacity of most economists at the time, I would not have expected Mises to provide a specific predictions. I do expect, however, modern economists, Austrian or not, to be able to make specific predictions in regards to financial bubbles. This is where Ron Paul and Peter Schiff fall short. Their predictions are not as nearly as accurate as Roubini's. They still are stuck at Mises level economic forecasts.
While Schiff is a terrible naysayer and exaggerating town crier, I'd still trust him to manage my portfolio. There haven't been many Mutual Funds in the past 20 years that could compete with EuroPacific Growth fund. The man knows how to invest wisely, even if his prognostications about the market in general are terrible.
It looks like the basic difference between Schiff and Laffer in this interview is not of their differing schools of economics but their difference of opinion on whether housing was overpriced. In retrospect it is obvious that Schiff was right about the bubble, whereas Laffer was drinking the rating agencies' Kool-Aid just like the rest of the market. But this is not because Schiff is an Austrian: a lot of non-Austrians also predicted the bubble. The government was aware of it years beforehand though it failed to do anything about it. Hell, JibJab acknowledged it at the end of 2005.
As were Joseph Stiglitz and Paul Krugman. Another who predicted the crash (and the causes underlying it )was Kevin Philips who published his "Bad Money" about 6 months before the recession really got going.
