'Economists have been led astray by rising stock prices many times before .. J.M. Keynes lost his shirt in the stock market after 1929, evidently believing the bear market to be an aberration (not coincidentally, his pleading for government intervention in the economy and the adoption of inflationist policies became very pronounced right after this episode) .. one should be extremely suspicious of the show of optimism on the part of economists.'<blockquote>'What makes these economists so confident? It can not be the slew of recent negative surprises in economic data, which has led to a plunge in Citigroup's global 'economic surprise index' from about 100 points to almost zero – a three month low.
It can not be the massive destruction of wealth in Japan after the tsunami either – except for those economists who still believe in the broken window fallacy (you'd be surprised how many of them do – one of the most prominent is even a Nobel Prize recipient – Paul Krugman). It can also not be the recent massive deterioration in the sovereign debt crisis in the euro area's periphery.
So what accounts for it? Simple – the rise in the stock market. Economists have been led astray by rising stock prices many times before. Famed US economist Irving Fisher believed that 'stock prices have reached a permanent plateau' and that 'nothing can stop a further expansion in prosperity' – right at the top in 1929. J.M. Keynes lost his shirt in the stock market after 1929, evidently believing the bear market to be an aberration (not coincidentally, his pleading for government intervention in the economy and the adoption of inflationist policies became very pronounced right after this episode). What did the stock market 'discount' in early September of 1929? We can tell you what it didn't discount: the Great Depression. In fact, by September of 1929, the US economy had been in contraction for well over a month already.
The failure of economists then and now is to realize that a boom due to credit expansion and inflation of the money supply is in fact not increasing wealth but doing the exact opposite: it consumes wealth. The inflation masks this capital consumption by creating fictitious profits – once the inflationary policy is stopped – as the Federal Reserve finally did in 1929 by raising its discount rate to 6.5% – the wealth destruction is unmasked. It is however important to realize that it is not the bust that is the destroyer of wealth – it is the boom. The bust merely reveals the investment mistakes of the boom and is a period of reorganization and healing. We know both from economic theory and the countless examples of history that once a bust begins, the best thing that can be done by the government is – absolutely nothing. When the first big government interventionists entered the scene in the form of presidents Hoover and FDR, the economy was deprived of the chance to heal itself and the Great Depression ensued. Robert Murphy has written
a highly recommended article that is once again dispelling the falsification of history that is today so popular among the interventionist Left, namely that Hoover was allegedly a 'laissez faire liquidationist'. He was the exact opposite, and as Murphy shows, the pro interventionists don't even seem to realize that in relating what Hoover did and didn't do, they themselves paint the picture of the interventionist Hoover really was. The idea that he trusted the market is preposterous. For this reason we resorted to calling today's interventionist brigade
'Hoover's Heirs' back in 2008.
In any event, one should be extremely suspicious of the show of optimism on the part of economists. The effect of the Fed's monetary pumping on prices is creating an illusion of prosperity that will once again be rendered asunder as soon as the inflation stops. Mainstream economists were very optimistic during the housing bubble as well – very few of them saw the disaster coming. However, we should all have learned a valuable lesson from the bust: namely that the profits generated by inflation are indeed fictitious. The financial sector accounted for 40% of the profits of listed corporations in 2007. Over the next two years all the bubble profits and more disappeared back into thin air..'
..
..Malthus and his disciples have been proven wrong for two
centuries now. How much more proof is required? Another century of their dire predictions not coming true? In fact, Malthus' error was precisely that he completely underestimated human ingenuity and the power of the free market. If anyone had told him that one day the planet would be able to feed over 6 billion people, he would have called such a proposition a preposterous fantasy. And yet, this is precisely what happened. Even if it is true that supplies of hydrocarbons are limited and insufficient for our projected future needs, there is no reason to assume that human ingenuity won't win out once again and a solution to the problem will be found. In fact, that is what we would bet on.
There is of course a great danger that must not remain unmentioned: because so many people today confuse our present system of state or crony capitalism with the ideal of free market capitalism – i.e. because capitalism has been given a bad rap that it doesn't deserve - there is a great danger that the free market will be further diminished by political means.'
- Acting Man,
The Magic of the Echo Bubble April 28th, 2011</blockquote>