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A Response to Anthony Migchel’s “Faux Economics”

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.



A Response to RealCurrencies

Among the many cries for monetary reform, there is a group of people who want the Federal Reserve to be assimilated into the Treasury Department and for the newly created money (which would be created at a much faster rate) to be lent out interest free.  All interest is usury that should be abolished, according to these people. Some of this I have dealt with in a previous post, but Anthony Migchels, writer of the blog RealCurrencies, is convinced that the Austrian case for a free market in currencies is actually a hoax.

Quote from Anthony Migchels: “In the old days of Austrian Economics things were simple: one just derided fiat currency. It is unfair to be raped by interest for paper money created out of nothing, even the Austrians will admit. So, they claim, stop fiat money and replace the paper with Gold. We’ll all feel a lot better when we can slave away for our usurious tributes to the Money Masters if we can pay in Gold coins.

If he seriously believes that in the old days of “Austrian Economics”, all you did was deride fiat currency, then Mr. Migchels hasn’t done that much research into Austrian Economics. For instance, he hasn’t read “Principles of Economics” by Carl Menger, the book which puts forth, in the clearest possible way, the principle of Subjective Marginal Utility; a principle which has completely revolutionized the science of economics.

Quote from Anthony Migchels: “But later things became a little more complicated. People started to wonder about the Gold Standards of the past. Weren’t these just banker operations? Don’t the bankers own all the gold? Haven’t they controlled Gold throughout modern history? And how about these Government controlled Gold Standards? Can’t Government just change the fixed price and mess up everything that way? And can we really trust them to indeed have the Gold they claim they have?

First of all, Mr. Migchel’s statement that gold standards have always been banker operations is factually inaccurate. Gold has been money for no less than 6,000 years, and this predates the earliest recorded bank in history by ~2,000 years

Secondly, Mr. Migchel doesn’t understand how ownership of currency works. Just as bankers didn’t own all of the gold, the bank does not own the money I now have in my pocket. I own that money, and no one else, and the only way the bank can have any sort of legitimate dealing with that money is by my permission. Period. It is here Mr. Migchels has demonstrated not only a severely impaired understanding of ownership, he has also demonstrated a complete lack of understanding as to what money is and where it comes from.

Money doesn’t have to be gold or silver, per se. In fact, historically, many things have been money, ranging from rocks, to gems, to salt, to iron and copper. Money is not some alien commodity that just fell from the sky, or was created by an elite to enslave people (as I’m assuming Mr. Migchel believes), money was created, and can only be created, by the market. It is a medium of exchange, selected by the people’s preferences (i.e., their buying and abstention from buying), by which goods and services are more easily exchanged. It allows for specialization of labor, and thereby increases the overall efficiency of the division of labor.

Money is, first and foremost, a commodity, and just like any commodity, there is a supply of, and a demand for it (which means it DOES exist in the realm of Supply and Demand… you know who you are….)

Mr. Migchel’s main gripe is with the practice of usury, i.e., loaning out money at interest. Here again, Mr. Migchel’s ignorance of the “Old Days” in Austrian Economics shows its ugly head. Had he simply bothered to type “Austrian Economics Interest” into Google, he would’ve found this blog post. Aside from being a fantastic exposition of the Austrian position on interest, the blog is basically a summary of Eugen von Bohm Bawerk’s “Capital and Interest”. Eugen von Bohm Bawerk was a student of the previously mentioned Carl Menger, and was the teacher of the man who would later become the face of the Austrian School, Ludwig von Mises.  For yet another response to Mr. Migchel’s position of usury, see the first link above in the first paragraph.

Quote from Anthony Migchel:  “Of course, Austrian Economics is well known for its trust in the magical ‘freedom’ of the market. First it has Government declare a ‘free market’, then it has Government enforce the contracts in this ‘free market’ and third it has Government look away if a few monopoly capitalists take this market overnight. Of course Government should not interfere if these capitalists show such wonderful ‘human action’ and gobble up the whole thing. Surely these capitalists would not win, were they not doing something right.

No, Austrian economists insist that monopolies on a free-market are impossible ( see here, here, and here).

Quote from Anthony Migchel:  “The minute Government creates this ‘free market’, it will be quickly conquered by the Money Power with its vast resources. It will have thousands of independent journalists and professors discuss the wonders of Gold as currency at its media outlets. It will pour in billions to open up thousands of ‘competing’ Gold banks, providing Gold based credit. The one at 4,9%, the next at 5,0%. Many of these outlets will actually believe they are really competing.

The Money Power will bribe politicians to only accept Gold coins in taxes.

Meanwhile, nobody will be investing one cent in Mutual Credit based facilities. Because there is nobody with the necessary resources.”

This is nothing short of a conspiratorial doomsday scenario that is based on truly shoddy historical research (as I pointed out earlier).

Mr. Migchel then proceeds to demonstrate that he is an economic illiterate, addressing the issue of if we did have free competition in currencies. In the process, he sharply contradicts himself.

Quote from Anthony Migchel:  Of course, would there be real competition, Gold would be absolutely irrelevant in a free market.

As we explained earlier (here and here), if Ron Paul’s “”Free Competition in Currency Act” (HR 1098)” (which would end legal tender laws and end taxing metals) would ever be enacted, nothing would happen.

Everybody would continue to hoard Gold and pay with Federal Reserve notes.

It’s called Gresham’s law: bad money drives out good money. It’s no use discussing this: just check it out for yourself: would you pay with your Gold coins or with your notes?”

Do you see the contradiction? Saying that nothing would happen if Ron Paul’s policy was enacted, and then to say that we’d be witnessing Gresham’s Law, is a contradiction that can only be made if you have little-to-no understanding as to what Gresham’s Law is.

Gresham’s Law, named after Sir Thomas Gresham, doesn’t come into play without legal tender laws. Period. In one of the links he posted, he addressed this very criticism by saying, “In response to a comment by Memehunter, quoting my article on Gary North, they elaborate on why they think I might be wrong.

They suggest that Gresham’s Law does not apply: “As we pointed out before, this is a misconstruing of Gresham’s Law. Gresham’s Law only applies to tender manipulated via government compulsion: ” ‘When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.’ It is commonly stated as: “Bad money drives out good”, but is more accurately stated: “Bad money drives out good if their exchange rate is set by law.”

However, the source for this info is Wikipedia, and I don’t believe the Daily Bell will blame me for not accepting that as Canon Law.
It may be true that this was the situation at Gresham’s time, but it is clear that his observation is true always when different units circulate side by side and one of them is overvalued. Or losing value.

Now we can begin to understand; it’s not that Mr. Migchel just doesn’t understand Gresham’s Law, it’s that he refuses to understand Gresham’s Law. Not only has Mr. Migchel refused to do any sort of sound research on Austrian Economics, he’s constantly spewing forth these nonsensical conspiracy theories about an elite creating these banks and using interest lending to enslave and exploit, but just a little bit of logic shows us exactly why interest lending isn’t exploitative in the least.

Suppose you have a borrower who his desperate to pay his mortgage; he’s $1,200 short this month. So he goes to his local lender to apply for a loan. After considering the pros and cons of the loan, the lender decided to charge an interest rate of 25%. For those who want to know the numbers,  that means the borrower will have to pay back the principle of $1,200, plus $300 in interest, for a total of $1,500.  Is this exploitation?

Not at all. Why? Because the borrower preferred the $1,200 he borrowed today to the $1,500 he will have to pay back in the future. If he made a mistake in his valuation, then the mistake is on the borrower, not the lender or the interest lending system.

Quote from Anthony Migchel:  “The second issue is, that would there be Mutual Credit Facilities competing with Gold banks, they would be offering credit at 0%, while the Gold banks would want 5% for their mortgages.

Where would you go for your loan?

Is it really any use discussing this further?

Click here for Mr. Migchel’s explanation of Mutual Credit Facilities, and it is one of the most absurd proposals I’ve ever heard. It will receive its own response in due time.

Quote from Anthony Migchel: “The ‘free market for currencies’ is just a ruse, made possible by Austrian Economics’s standard way of ignoring market power. They only look at Government intervention, but they always ignore the elephants monopolizing the helpless ‘free market’.

Should there be a ‘free market’ for currencies, especially if the Federal Reserve Notes would be phased out, the massively funded and promoted Gold dealers would quickly gobble it up and tightly controlled specie, easily inflated and deflated and taxed with interest, would provide the Money Power with the de facto Gold Standard it wants.

I can’t tell if it’s typographical errors or what, but Mr. Migchel’s proposal is really hard to understand here. Is he seriously proposing that Gold dealers would control all of the gold, inflating and deflating at will? Does he fault the Electronic dealers for controlling all of the electronics, inflating and deflating at will? The logic is the same in both cases, and it’s completely silly.

In conclusion, I’m afraid Mr. Migchel has a lot to learn about economics.