A version of this article first appeared on November 8, 2016 in the Stansberry Digest, published by Stansberry & Associates Investment Research, an independent investment research firm. You can visit them at www.stansberryresearch.com.
As we always tell our subscribers – There’s no such thing as teaching, only learning. What we mean is, no matter how valuable the information we’re giving you is, and no matter how urgently we deliver it … we can’t do anything to help you unless you’re willing to think and study the materials. You have to open your mind and you have to read carefully.
What are we talking about? What is the big underlying force that moves the market forward or causes it to collapse? The answer won’t surprise you.
A very old school of economic thought – known as the Austrian School of Economics teaches these concepts. (It’s known as the Austrian School because in the 1800s, when these ideas were first discussed, Prussian universities dominated academic economics. The leaders of those schools were dismissive of these new ideas and labeled them “Austrian” as a pejorative term, as if they were unsophisticated and unworthy ideas. Later, the term stuck because many of the best writers and thinkers in the Austrian School studied at the University of Vienna.)
You might have heard of some of these economists: Ludwig von Mises, Friedrich Hayek, Carl Menger, Eugen Bohm von Bawerk, Joseph Schumpeter and Oskar Morgenstern.
Many of their ideas and theories have since proven to be extremely powerful. For example, it was the Austrian School (Oskar Morgenstern and John von Neumann) that led to the discovery of game theory, an understanding of human decision-making that guided policy during the Cold War. Friedrich Hayek was awarded the Nobel Prize in Economics for his ideas about how money serves as the primary means of communication in an economy, not merely as a medium of exchange and saving.
You don’t need to become an Austrian economist to understand two of the most important foundations of their theories:
ONE: The economy can’t be understood (or predicted) by the study of groups. It is individuals making individual decisions to maximize their own utility, that will guide the collective – not the other way around.
Now, I know that sounds pretty obvious – but it isn’t obvious to government economists, Marxists or Socialists. Many people around the world continue to believe in policies that try to control or exploit groups without considering the obvious negative implications for the individual and their resulting actions.
A classic recent example – when states like Maryland try to increase the rate of income taxes on the rich, only to discover that the amount they collect decreases because individuals simply move rather than let themselves be targeted and treated unfairly.
TWO: Inflation can’t be accurately measured by price indexes. It can only be measured at tis root – by the increase of money and credit in excess of savings.
Austrian economists would immediately understand that it doesn’t matter whether newly created money flowed into commodities (and created CPI-measured inflation) or real estate (and created an asset bubble). All inflations were caused by the creation of money and credit in excess of savings.
Furthermore, that inflation was the cause of the business cycle. To continue a boom, more and more inflation would have to be created. The only way to truly clear the market would be to let prices find their natural foundation, at a level equal to real savings. This is simple common sense dressed up with math and theory.
What Have We Done?
An individual doesn’t enrich himself by borrowing capital. He can only enrich himself by carefully increasing his utility (his skills), saving his excess production and investing that capital wisely, to further increase his production. Nothing could be true of a national economy that isn’t also true for the individual.
But consider our policies over the past decade … or four decades. Has the United States of America worked diligently to increase its national production? Have we carefully saved our excess capacity and invested wisely in further increases to production? No.
Instead, we’ve been borrowing more and more money and consuming more and more of our capital. Every downturn in our economy has been met with more printing and more borrowing until finally, the numbers are downright insane.
While this is true at virtually every level of our society, it’s easiest to track the numbers at the federal level. President Obama has increased the national debt by $14 trillion in only eight years. That’s more money than our country has every borrowed – in total – prior to his presidency. In addition, the total size of the balance sheet of our most important bank, the Federal Reserve, has boon from $800 billion to more than $4 trillion.
This, the Austrians would teach us, is a recipe for a massive inflationary boom. And we’ve seen it. The trouble is, the Austrians also teach us that either the inflation must recede to the economy’s natural level of savings or even greater amounts of inflation will be required to sustain the boom. In other words, the boom will eventually peter out, as demand cannot be sustained enough to keep it going.
Therefore, it was always only a matter of time before increases to production began to wane. It was only a matter of time before profits began to recede. It was only a matter of time before loans began to sour. And it is only a matter of time before a new panic emerges as every individual tries to salvage whatever remains of the unsustainable boom.
[AOA: It did not matter whether Hillary or Trump was elected … we will have a major recession within the next 36 months. The debt that has been built up during the past administrations guarantee it!]