Saturday, February 19, 2011

Of Two Minds: Interesting Guest Essay

Charles Hugh Smith has opened up his place for another guest essay, this one from Eric A. called "Meme Theory and Markets."  The essay is fairly lengthy and chock full of charts, so I've only been able to skim it.  I will return to give it more attention, though, as it hits on a lot of themes and ideas that I've been pursuing for the last year or so (fractals, memes, etc.).  I do have some initial thoughts, though.

Eric A. is clearly another Austrian-inspired person, which means that he accepts that the boom-bust business cycle is "natural."  I don't.  While I accept that the boom-bust business cycle is a natural consequence of human behavior, I do not accept that the boom-bust cycle itself is natural.  Without the leveraged financial speculator, the deep boom-bust cycles of the industrail era simply would not happen.  The human fractal function operates in response to an input, and if that input is gamed by leveraged financials speculators who also control access to credit, you will see wild swings in market behavior (i.e., booms and busts) as a result.  Credit simply should not be extended to financial speculators, and financial speculation should be criminalized.   Make those changes, and the "natural" boom-bust cycle will disappear from the face of the earth, as capital will flow into real investments instead of speculative financial instruments such as the secondary equity market.

There is a throwaway line about Keynesianism that refers to it as "printing your way to prosperity," which is not what Keynes actually proposed.   Keynes sought to "euthanize the rentier class" by providing counter-cyclical pressures that would reduce the incentives to engage in the financial speculation that is always the cause of boom-bust cycles.  Because speculators profit both when the bubble is being deflated and while it is deflating, they have every incentive to drive boom-bust cycles.  Keynes sought to change that dynamic (albeit in a cowardly way; he should have called for criminalizing financial speculation).