My Austrian Economic Speech at the NY Federal Reserve
Investing based on The Austrian school of Economics
The info-graphic above shows some differences in Keynesian and Austrian
views. Courtesy of The Austrian Insider
Interview of Robert Wenzel by FRA Co-founder Gordon T Long.
Across well-known literature, the Austrian school of economics has earned
and put its indelible mark on the complicated world of economic analysis and
theory. The school of thought varies significantly from the mainstream
schools of economics like the classical, neoclassical and Keynesian schools
of thought. In essence the Austrian school of thought believes in using
logical thoughts to explain and solve economic problems rather than getting
technical and going into mathematics to explain the same problems.
"The key to understanding is that what you have with mainstream
economists is that they look at things from a very mathematical, very
empirical approach... unlike in physical sciences you cannot do that for the
science of economics because you're dealing so many variables like changes
and desires"
Unlike the mainstream none-Austrian economists, Wenzel believes that
there's a lot to be understood from the economy based on logical build up
from solid premises. He goes on to mention that another key aspect to be
understood is that Austrian economists believe that when the Fed injects
money into certain sectors of the economy, it's those sectors that turn to
boom. According to Wenzel, when the Feds eventually start tightening this
money supply it leads to a crash.
On the current economy:
"We're in a period of accelerated money supply"
Wenzel thinks there could be an increase in price inflation and the
possibility of another dip in the price of oil.
Explaining how we have inflation in some areas and deflation in others
when we've been pumping money into the system, he explains it by outlining
how it depends on how quickly people want to spend the money.
"if there's a great desire to hold money, you're not going to see
the inflation right away"
When people don't spend money what happens is you have money building up
in cash balances which Wenzel terms "the desire to hold cash
balances". With this you see people reluctant to spend money and hence a
low velocity of money.
On the confusing environment of economics and how understanding the
Austrian school can help to clear things up .... Understanding the business
cycle and inflation comes about in terms of the Austrian school of thought.
It definitely helps to clear a lot of things up but even more can be taken
from this approach. The methodology additionally helps out in terms of having
people analyzing the world through logic rather than attacking it solely with
empirical data.
On considering Quantitative easing and going into negative nominal rates
.... QE is a method where the fed prints a lot of money and buys long
duration debt. The negative nominal rates idea is based on the Keynesian idea
that it's spending that helps the economy to grow, so the idea is to use
negative rates to pressure people to spend their money. Wenzel calls this
"a tax on holding money".
Asked if he sees Hyperinflation in the future:
It could happen at some point. The Fed's target of 2% could easily go
up to three 3% with accelerated printing of money. At this point they might
raise rates but if the inflation is at 5% and they raise rates from 12bp to
2% that still won't be able to fight the inflation. However it may be too
soon to say hyperinflation.
The business cycle should be understood as a boom and bust cycle.
"Whatever is going up now does not necessarily mean it will go up
long term. The bust will occur but they will pump it up with new fed
printing, which is eventually where the inflation comes in"
Abstract by Agang Moeng. Can be reached at agang.moeng@ryerson.ca
