Austrian School versus fantasy

I just read a great article about why Austrian School economics is not popular, while economics for mental defectives (Keynesian being the worst) almost always gets implemented by politicians, damn the consequences. I am Austrian School, by the way, because I happen to think that things that have good results are better than things that cause catastrophes.

Full article, awesome excerpt below:

"OVER THE CLIFF

Three things are driving the West's economy toward a cliff: government debt, bank leverage, and fiat money.

The increase in national government debt since early 2008 is unprecedented. This is because, in a recession, politicians vote for bailouts, which increase the government's deficit. Meanwhile, central banks buy assets of any kind in order to flood the economy with newly created fiat money, thereby saving the banking system.

This two-fold policy response – deficits and fiat money (money just printed up and not backed by anything)– is promoted by all schools of economics except Austrianism. The school of economics that is most prominent today, and which gets good media publicity for promoting the two-fold policy response, is Keynesianism. Members of the other schools of thought meekly ratify what the Keynesians promote openly, mumbling that "there is no other choice in this crisis." The Austrians protest, but until 2008, hardly anyone paid any attention to them or their protest.

Keynesianism's solution to recessions is always the same: to have the national government borrow money that would have been lent to the private sector. The theory is that when governments spend borrowed money, this increases economic growth, because the government spends the money rather than private producers and borrowers.

The Keynesian system rests on two unstated assumptions, which are illogical and therefore never stated plainly for the public to see.

1. Government spending of borrowed money that supports unemployed workers or funds corporate bailouts is economically productive and will restore economic growth and end the recession.
2. Private sector spending of borrowed money enables consumers to buy what they want and also enables businesses to purchase capital goods, labor, and raw materials in order to produce consumer goods and services. This is economically wasteful and extends the recession.

When I state it this way, a normal person thinks: "This makes no sense. Why should government borrowing to pay people not to work and also to pay for government bailouts be productive, while allowing consumers and producers to choose their own level of debt is destructive?" So, non-Austrian School economists never go into print with the two assumptions. As well-paid designers of fine new wardrobes for emperors, they prefer not to let voters inside the weaving room.

The Austrians' policy recommendations are part of a four-point program. First, governments should cut spending enough to produce a fiscal surplus, despite major tax cuts. Second, governments should cease borrowing. Third, the central bank should cease buying assets.

The Austrian camp is divided on point four: whether the budget surplus should be used to pay down the national debt, or whether the money should be returned to taxpayers, accompanied by an outright default on the national debt.

How popular with politicians is this agenda? It isn't. How popular is it with voters? Not very, especially when a crisis in the stock market is taking place, and over-indebted banks and corporations are going bankrupt.

No politician has ever run on this platform: "Abolish the FDIC!" The FDIC guarantees the bailout of depositors, up to $250,000 per bank. It also guarantees that the money supply will never shrink because of failing banks, the way it did in the United States, 1930–33, when about 9,000 banks went bust – but no large bank. Large banks had the support of the Federal Reserve System. Voters love the FDIC. There are well-organized permanent political constituencies for the latest designs of clothing for emperors. There are hundreds of millions of believers in the wisdom of emperors. This is why non-Austrian School economists always have good jobs.

This is also why Austrian School economists are relegated to the fringes: websites and podcasts. They are ignored by newspapers and network TV. They are especially kept out of university economics departments. Nobody in academia wants to let an Austrian School economist get close to impressionable children, who have perceptive eyes and who might call out something embarrassing from the sidelines in the middle of the big parade.

RUNNING OUT OF TIME

The idea that the debt markets are running out of time is now gaining attention. This is the first time in my lifetime that this idea has penetrated the consciousness of the general public.

It is still being denied by the chattering class. Non-Austrian School pundits are still fervently repeating the Party Line, to wit:

The debt of the United States government is essentially risk-less. A 90-day U.S. Treasury bill is the closest thing in history to a risk-free investment. This debt is AAA-rated, and should be.

There is no possibility that Asian central banks will ever cease buying U.S. Treasury debt, let alone sell their existing portfolios. Asian manufacturers cannot possibly do without American consumers. This is why Asian central banks buy U.S. Treasury debt by inflating their own domestic currencies: to hold down interest rates in the United States, thereby enabling American consumers to borrow money to buy Asian goods, rather than letting Asians buy these goods. American consumers are vital to Asia. Asian consumers are not. Thus it has always been. Thus it will always be."

The stuff in the blue boxes above is so stupid it's infuriating. I ran into this same kind of dogmatic, no-brain-required crap before the last crisis. I pointed out the math and how there would be a crisis and economic Armageddon, with house prices dropping by 42%, I estimated. (20-70% nationwide so far.) I was always told that it magically couldn't happen, that house prices somehow can't drop, and all kind of other drivel. For the record, when it is no longer most advantageous for Asian countries to hold our debt, they won't. Period. Also for the record, second half of last year they were net sellers.