Anthony Migchel, author of the blog RealCurrencies, didn’t take too kindly to my attack on him, and referred me to his page where he has, according to him, “gone over these points endlessly.” Well, to say I am not impressed is an understatement. I’ve only read the first paragraph thus far, and literally every single sentence within that paragraph is flat-out wrong. I am now convinced that Mr. Migchel has not read any Austrian literature, for anyone who has would not make mistakes like the ones he’s made.
Quote from Anthony Migchel: “Addresses manipulation of volume as the cause of the boom/bust cycle. But blames the State for this, instead of the Money Power.”
This is what Mr. Migchel opens his “Faux Economics” page with, and just that fast he has made several mistakes. In the first place, the Austrian theory of the business cycle blames the practice of Fractional Reserve Banking for the boom/bust cycle. This can be practiced by a purely private bank, a bank with a state charter, or a central bank. The artificial creation of credit via Fractional Reserve Banking causes entrepreneurs to make ghastly long term investment mistakes, which eventually show themselves as just that; mistakes. What Austrians have said, however, is that it is far easier for a bank with a State Charter or a Central Bank to practice FRB (Fractional Reserve Banking) due to the fact that banks with state charters and central banks have more reach, more resources, and more confidence among the people than the traditional private bank, and thus, the boom/bust cycle is far greater than it otherwise would’ve been.
This is the Austrian theory of the business cycle simplified, but apparently Mr. Migchel couldn’t be bothered to actually research his opponent’s position before denouncing them as “Shills for the MONEY POWER.” He has no clue for instance that two of the best treatises on Austrian economics reflect that very same view. The Theory of Money and Credit by Ludwig von Mises, and Money, Bank Credit, and Economic Cycles by Spanish economist, Jesus Huerta de Soto.
He has no clue for instance that Murray Rothbard, arguably the best Austrian economist to ever live, wrote a book slamming bankers for their influence on world affairs. He also doesn’t know that the same Murray Rothbard pointed out that the practice of FRB is inherently fraudulent because it is in direct violation of the very contract that banks make you sign when you open an account with them.
Quote from Anthony Migchel: “Ignores the wealth transfer from poor to rich through interest and tries to explain it away as a normal free market price for money.”
You know, one of the links in my last post to Mr. Migchel, specifically this link, denied this very line of thought.
Quote from my link: “When posed the question “what is interest?”, one common response is that it is the price of money. This is not true. The price of money, like any other good, is the amount of something else that must be traded for it. To see this, consider the converse: what is the price of a tomato? Well, it is the number of dollars that must be given up in exchange for a tomato. Ok, how about the price of a banana? Again, it is the number of dollars that must be given up in exchange for a banana. Because dollars are money the price of all goods is expressed in dollars, whereas the price of dollars is expressed in other goods.”
So, again I am convinced that Mr. Migchel has not read, and absolutely refuses to read, any text on Austrian economics. Had he simply read the blog post that I specifically linked to him, he would’ve known that Austrians do not say that interest is the free-market price of money.
Quote from Anthony Migchel: “Modern Austrians want a free market for currencies, which is positive. They mistakenly claim Gold will prove to be best in such market.”
No, the Austrian who wants a free market in currencies says that it doesn’t matter which currency comes out the best, because what is money is being decided by the people and not by government/banker bureaucrats.
Quote from Anthony Migchel: “But Gresham’s Law predicts people will hoard gold and pay with paper.”
Again, even after being corrected on this, Mr. Migchel still insists on promoting this completely wrong view of Gresham’s Law. Gresham’s Law only comes into play when the conversion ratio between two commodities is fixed by the state. Period. If the conversion ratio is not fixed, it is not Gresham’s Law. For example, suppose the State decrees that any debts of $20 can be paid in 1 ounce of gold. The problem is that the market values gold at $15. So now, people will buy 1 ounce of gold for $15, and use it to pay off the $20 debt, saving himself $5.
In other words, because the conversion ratio is fixed by law, there is a massive incentive for this kind of behavior. But without this decree from the state, there’s no incentive for this kind of behavior, nor will it send gold flying out of the country. If the market rate is $20 = 1 ounce of gold, then any debt of $20 can be paid either in dollars or gold. It’s up to the debtor. If he pays in dollars, that’s fine. If he pays in gold, that’s fine too, but there is no monetary incentive in this case from him to trade gold for dollars or dollars for gold to pay the debt in question.
As for your hoarding gold claim, this is equally silly. Some producers will only accept gold as payment for goods and services rendered, and as such, gold will still be circulating within the economy. Since there is a free market in currencies, you can also buy and trade in currencies. In other words, you can buy dollars and sell gold, or you can sell dollars and buy gold. Seeing as there are shops that only accept gold as payment, that will be entirely up to the people as to what currencies they hold. If they don’t like gold, they don’t have to shop at the places that only accept gold.
I strongly recommend dropping this Gresham’s Law argument. Aside from it being based on fallacious reasoning, it is also based on a misunderstanding of Gresham’s Law that will get you laughed at by just about any economist who knows their stuff, Austrian or not.
Quote from Anthony Migchel: “Deflation hurts debtors (90% of the population), as the value of debts and the interest payed over them increases in value.”
Deflation does no such thing. Are you seriously worse off because you have to pay less for food, clothing, etc.? And by the way, it’s paid, not payed.
Quote from Anthony Migchel: “Kills economic growth because people hoard cash instead of investing and consuming.”
So, in their compulsive need to hoard cash, people aren’t going to consume anymore? So does this mean these people won’t be buying food, basic clothes, paying rent, etc.? People are going to consume regardless of their expectations, because there are basic necessities that everyone has to have. Even the richest banker in the world has to eat. Just because they aren’t spending as much money, and on what, as YOU want them to gives you no right to denounce them as hoarders.
By the way, saving (hoarding) is investing. Even Keynes said that much, as Paul Krugman points out.
Quote from Anthony Migchel: “Deflation is a result of crashing demand, due to a contracting money supply.”
This is an old mercantilist myth. Deflation is a contracting money supply, not the result of something.
Quote from Anthony Migchel: “The associated declining prices are not a boon, but a symptom of a serious disease.”
If Mr. Migchel really feels that declining prices are a symptom of a serious disease, he could do something about it. The next time he goes to the grocery store, he can mark up the price of all the items he picks out by 50%, and when he pays for his items, pay that amount in cash and tell the cashier to keep the change.
Of course, no sane person would do this, and just as no sane person would intentionally pay more than the price listed for basic needs, no sane person believes that we are worse off due to falling prices.
Mr. Migchel clearly has a lot to learn.