However, the Austrian economics also has its vulgar form. Much of what is called “Austrian economics” is not the real thing. It's actually a shallow, vulgar version of it—the sort of “Austrianism” whose substance can be conveyed in three or four simple slogans:
- We've been headed towards hell ever since we parted with the real (gold) money.
- The Fed (or any other central bank) keeps blowing the bubble of fiat currency; however, the bubble will burst one day, and it will be seriously ugly. Get ready for your stock portfolios being wiped out.
- Before the day when the Final Burst comes, we'll suffer from the Fed-engineered hyperinflation or galloping inflation at best. Blame the Fed.
- The officially published inflation statistics are intentionally distorted; anyway, the proper inflation measure is money supply rather than the consumer price index.
“The guru believes the U.S. is merely experiencing a 'rally in a bear market,' and is lagging the rest of the world 'for a reason.' The worst is not over, according to the guru, who predicts the Dow will fall another 90% from current levels when measured against gold. A longtime dollar bear and gold bull, he foresees gold hitting $5000 per ounce 'in the next couple of years,' and predicts the Dow and gold will trade on a one-to-one ratio vs. the current level of around 9.7-to-1.”
Admittedly, gold was a great investment opportunity in September 2009, even if it has yet to break the $1900 mark. Nevertheless, the guru got it all wrong with the Dow. That may be ascribed to one particular characteristic of the vulgar Austrianism, which is a special sort of chiliasm: they expect the Day of Judgment or the Final Burst to come and destroy everything, the stock market being the first in the queue.
Nevertheless, the Final Burst hasn't come yet, neither has hyperinflation, gold has got cheaper, while the Dow broke the 17,000 mark. That's why the Austrian economics has become the subject of growing derision.
Professor Noah Smith published a particularly acerbic attack on Bloomberg.com. Unfortunately, Smith does not make the important difference between the proper Austrian economics and the vulgar version thereof.
Moreover, when he dismisses the Austrian view on inflation (money supply is more real than the CPI), he forgets that the original meaning of the term was monetary inflation. “Inflation is the process of making addition to currencies not based on a commensurate increase in the production of goods,” says the Federal Reserve Bulletin of 1919. No mention of a price level. This has been the traditional, money supply-based understanding of inflation, which predated the concept of CPI.
This is where even the vulgar Austrians are true: the CPI has been distorted beyond the point of futility. Since the real estate prices were replaced by the imputed rent in the consumer basket in the 1980's and since the Boskin Commission introduced the “hedonic adjustment” methodology in 1995, the CPI has been neutered and boned. The inflation figures have been seriously distorted downwards, which has prompted the Fed to pursue wildly wrong monetary policies that eventually caused the credit bubble and the financial crisis to emerge—the crisis, which few mainstream economists predicted, if any.
In Smith's own words:
“It’s hard to overstate how few solid conclusions have emerged out of a century of macroeconomic research. We don’t even have a good grasp of what causes recessions.”
To be fair to Smith, he can attack the mainstream in a similarly scathing manner. Good.
When talking about the real Austrians of the no-nonsense variety, they may know more about the causes of recession. The single most important key word is malinvestments. They cause recessions and banking crises; they occur when the money supply inflation and the volume of credit outstanding grow too fast. That's the gist of the problem.
The mainstream should pay more attention.
Meanwhile, the MZM (Money Zero Maturity) money supply volume has swollen by 56% since the start of the recession in November 2007. It's about seven percent per annum. Low inflation?
Note: This is a good answer to Noah Smith.