How Bad Is Currency Debasement of the Dollar? (And Is There Anything We Can Do about It?)

How Bad Is Currency Debasement of the Dollar? (And Is There Anything We Can Do about It?)

04/02/2022Patrick Barron

Well, currency debasement is pretty bad, as a few key statistics will reveal, but first some background.

At the Bretton Woods Conference in 1944 the US agreed that it would redeem dollars for gold at $35 per ounce. If the US conducted a disciplined and honest monetary system, this would mean that the dollar was "as good as gold"; i.e., the US would not create more dollars unless it had gold to back them at the agreed upon rate. Foreign central banks could use the dollar as a proxy for gold in international settlements of trade, reducing the need for foreign central banks, many of whom had shipped their gold to the US during the war, to hold much actual gold bullion. Foreign central banks could simply hold dollars. If a foreign central bank built up more dollar reserves than it needed for trade settlement, it could present dollars to the US Treasury/Federal Reserve Bank and receive actual gold bullion at the agreed upon rate of $35 per ounce.

All appeared to go swimmingly until the French smelled a rat in the late 1960's. Both French President Charles de Gaulle and his finance minister Jacques Rueff were astute economists of the Austrian school. De Gaulle instructed the Bank of France to redeem eighty percent of its dollars for gold. The bank run was on! US gold reserves dwindled until the US had to make a choice and, yes, it did have a choice. The US could have devalued the dollar to require more dollars per ounce of gold and then adopted measures to reassure our allies and trading partners that it would be good stewards of the dollar thereafter. Instead, Nixon took the US completely off the gold standard in the fall of 1971.

The following table is instructive, both for what caused the run on the US gold reserves and the parameters of what the US could do now to stabilize the dollar and prevent its complete destruction:


















Between the end of World War II in 1945 and Nixon taking the US off the gold standard in 1971 the amount of gold held by the Treasury/Fed halved and both the monetary base and M1 doubled. This was enough to end the charade that the US had been a good steward of the international monetary system based upon the "good-as-gold" dollar at $35 per ounce.

But in hindsight the US's monetary stewardship in the quarter century from the end of the war until the end of the gold standard appears as one of integrity, honesty, etc. compared to what has happened since. The amount of gold held by the Treasury/Fed has shrunk somewhat, but we really don't know if it really is there, since there has not been a physical audit of the nation's gold for many decades. What's truly shocking is the expansion of both base money and the money stock in the fifty years of pure fiat money. The monetary base has increased by seventy-three (73) times its 1971 level. The money stock has increased by ninety-one (91) times. There is no reason to believe that the money expansion machine will stop or even slow down. In fact it may speed up. Just consider what the current administration, supported by a majority in Congress, wish to spend--infrastructure bill, build-back-better bill, an increase for the military (of course!), more stimulus checks to help people pay for their increased energy bills. There is no budgetary discipline. Nevertheless, if government will not instill discipline, markets will. The dollar will collapse into worthlessness.

Is There Anything We Can Do about It?

But there is an alternative. Despite the huge ratio of dollars to gold, the US could still tie the dollar to its gold supply. Per Ludwig von Mises in Omnipotent Government:

Every nation, whether rich or poor, powerful or feeble, can at any hour once again adopt the gold standard.

It would have to set up an independent agency to oversee the absolute right that anyone could redeem dollars for gold at the new higher exchange rate. The Fed would have to be phased out, especially its monetary meddling operation by which it sets interest rates and monetizes government debt. The federal government would have to balance its budget, but it can be done. In fact it has been done. Germany ended its post-World War I hyperinflation by issuing a new currency and slashing its federal budget. If the Germans can do it after a humiliating defeat in war and after suffering the horrible terms of the Versailles Treaty, the US can do it in the absence of such conditions. Per Ludwig von Mises, in “Economic Freedom and Interventionism”:

The return to gold does not depend on the fulfillment of some material condition. It is an ideological problem. It presupposes one thing: the abandonment of the illusion that increasing the quantity of money creates prosperity. 

The solution is simple even if politically difficult. In 1953 Ludwig von Mises added Part Four, titled "Monetary Reconstruction", to his 1912 masterpiece The Theory of Money and Credit. Part Four contained three chapters, the final of which is titled "The Return to Sound Money". In this short chapter Mises laid out a simple plan by which any nation, although he specifically mentioned the United States, can return to sound money; i.e., a gold backed currency. The fact that the US has greatly inflated its money stock since 1953 does not change the mechanism by which a gold-backed dollar can be reinstated or the benefit of doing so. Time is running out, though. It may well be impossible to do after the world starts abandoning the dollar.

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End the Incorporation Doctrine

9 hours agoRyan McMaken

Since the Civil War, perhaps no development in American law or politics has done more to expand the de jure power of the federal government than the Incorporation Doctrine. This legal doctrine took a Bill of Rights designed to limit federal power over the states and did exactly the opposite: it greatly expanded the role of the federal government in potentially regulating every aspect of daily life within the states themselves. 

So what is the Incorporation Doctrine?

Stephan Kinsella defines it:

The meaning of the Fourteenth Amendment, “ratified” in 1868, has been debated for about 140 years now–and increasingly so in the last 90 or so years as the “Due Process” clause of that Amendment was used as a source of federal power over the states, via the “incorporation doctrine,” under which many of the rights implicit in the first 8 amendments of the Bill of Rights have been “incorporated” into the Due Process clause and thereby “applied” to the states.

Then concludes: 

I come to my main point. If it is true that, at best, the Fourteenth Amendment does not clearly grant to the feds a host of new powers–and even if there are arguments for it (as Thomas himself leans toward), it is clear that there is no such clear grant–then it does not grant them. Just as we interpret serious agreements strictly, and against the drafter; just as we require formalities and writings for serious matters (such as living wills, sales of real estate, and so on), so a wide grant of power to the central state, in the context of a decentralist Constitution where the states historically jealously guarded their sovereignty, must be clear and expressly written to take effect. In other words, the central state should not be allowed–as a matter of constitutional or libertarian norms–to legitimately shift the balance of power away from the states, and toward itself, by vague and ambiguous wording that it itself drafted.

There is no historical or legal basis for the Doctrine in the actual texts of the Constitution, but as a matter of limiting state power, the Doctrine must also be opposed on practical grounds. After all, it is the Incorporation Doctrine which has provided legal scholars and politicians a pretext under which to claim that the federal government should be the last word in virtually every legal conflict in America, from school prayer, to local taxes, to gun ownership. One even often encounters self-identified laissez-faire libertarians who completely accept that the federal courts should intervene in local city council meetings to decide the propriety of local eminent domain laws.  Lew Rockwell has explained just how wrong this approach is: 

 [I]t would be no victory for your liberty if, for example, the Chinese government assumed jurisdiction over your downtown streets in order to liberate them from zoning ordinances. Zoning violates property rights, but imperialism violates the right of a people to govern themselves. The Chinese government lacks both jurisdiction and moral standing to intervene. What goes for the Chinese government goes for any distant government that presumes control over government closer to home.

How is the libertarian to choose when there is a conflict between the demands of liberty and strictures against empire? The answer is not always easy, but experience and the whole intellectual history of liberalism suggest that decentralized government is most compatible with long-run concerns for liberty. This is why all the founders were attached to the idea of federalism: that the states within the union were the primary governing units, and the Bill of Rights was to protect both individuals and the states from impositions by the central government—even when liberty is invoked as a justification. 

Just so that we are clear on this last point: the purpose of the Bill of Rights was to state very clearly and plainly what the Federal Government may not do. That's why they were attached to the Constitution. The states, under the influence of skeptics of the Constitution's limits on the central power, insisted that the restrictions on the government be spelled out. The Bill of Rights did not provide a mandate for what the Federal Government may do. You can argue all you want about the 14th amendment and due process. But a reading that says it magically transforms the whole Bill of Rights to mean the exact opposite of its original intent is pure fantasy.

At the heart of all this is the fact that a federal government that has the power and authority to decide what is "constitutional" in every corner of the empire also has the power to force state and local governments to submit to federal laws. 

In other words, the Incorporation Doctrine largely abolished the United States as a confederation of independent states, and moves it far down the road toward becoming a unitary consolidated government. The more practical and wise classical liberals of the eighteenth and nineteenth centuries understood this and opposed the consolidation of American law under a national government.  Mike Maharrey explains why

I think centralizing power is always a net loss for liberty. So did the founding generation. This is why the framers of the Constitution emphatically rejected a proposal to give the federal government veto power over state laws. It’s also why the first Congress rejected applying some provisions of the Bill of Rights to the states.

When I say this, it tends to confuse people, because, in today’s political system, the federal government vetoes state laws all the time through federal courts. And virtually every time somebody perceives that a state government has violated their rights, they run straight to federal courts to stop the offending state action.

Despite my protests, the application of the federal Bill of Rights to the states has become a key feature of the American political system.

As I said, I believe this will ultimately prove to be a net loss for liberty. When you turn to federal courts to protect your liberty from state actions, you’re playing a game of Russian roulette with five bullets loaded into your six-shooter. Despite a few minor victories here and there, federal courts almost always come out with opinions that expand government power, not protect individual liberty. And these expansions of government power become the law of the land across the entire United States. In a decentralized system, bad state court decisions only impact the people in that one state.

The risk isn’t worth the reward.

Essentially, the Incorporation Doctrine renders the Tenth Amendment null and void. We can have a functioning Tenth Amendment, or we can have an Incorporation Doctrine. But not both. 

It's also why here at, we are explicitly decentralist and opposed to applying the Bill of Rights to the state governments. It's a good thing when the state constitutions have their own bills of rights, naturally.  Most states do have them, and most of them are quite good. But it is both dangerous and illiberal to insist that the federal government meddle in state and local governments to change state laws and dictate to states what is "constitutional." That was never the intent of the American constitutional system, and the very idea of incorporation destroys the original intent of the Bill of Rights, which was to limit federal law. 

Rather, the idea of the American confederation was to provide protections for liberty through competition among states, and through balancing state power against federal power. The Incorporation Doctrine, however, has greatly tipped the legal scales in favor of federal power and makes the United States far more of a consolidated state than was ever intended. If we're serious about expanding laissez-faire and true self-determination in the United States, the Incorporation Doctrine must be abolished. 

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Biden: A Proxy War with Russia Is Not Enough. We Must Also Seek War with China

If you need any more evidence that U.S. foreign policy is completely out of control, look no further than Commander-in-Chief Biden’s latest pronouncements regarding Taiwan – which is not a country.

That’s right. Not according to the United Nations or the United States government.

In fact, it is acknowledged by both that Taiwan is part of China.

Still, since its decision in the 1940s to begin seriously intervening on the side of the corrupt but nominally republican government of Chiang Kai-Shekin his decade-long struggle for power against Mao and his communist peasant guerillas, it has been U.S. policy to prevent the conclusion of the war by communist Beijing reunifying Taiwan with the mainland.

From Eisenhower to Clinton, any saber-rattling by Beijing was met with the same response: a U.S. carrier sailing through the narrow waterway separating the island(s) from the mainland.

After it recognized Beijing’s legitimacy in the 1970s, the U.S. ripped up its prior defense guarantee to the island, replacing it with security assurances akin to those received by Ukraine via the Budapest Memorandum. Officially, the U.S. position was “strategic ambiguity.” That is, it would not say one way or the other whether or not it would intervene militarily in the event of a mainland attempt to retake the island.

The tactic, maintained through six administrations and four decades, has now been thrown out the window.

After hinting this past year that he favored military intervention, Biden has now declared openly that the U.S. would militarily intervene in the event of an attack by Beijing

This amounts to a de facto preemptive declaration of war on China whenever Taipei decides.

While one is tempted to say the Senate ought to be consulted and their assent given, so mad for war is Washington these days the administration would no doubt get it.


The strategy of moving to contain China, a slow creep these past years, is now being escalated dramatically.

Other economic news announced by the White House the same day as Biden’s unilateral decree gives one to understand the Biden administration will not be risking Congress’ interference in U.S. grand strategy – which apparently amounts to needlessly escalating the single most dangerous point of transitional friction between great powers in the world.

Seeing the need to economically as well as military contain China, the Obama administration worked hard to negotiate the TPP: the largest free trade zone in the world for the next century, with the rules written largely by Washington, it could be used to constrain Beijing’s growing economic might.

When then-President Donald Trump tore up the TPP, China hawks were incredulous: after all, how could someone who wanted to get tough with China do something so obviously counterproductive?

As Thomas Freidman at the New York Times fumed at the time: why go it alone when you could gang up on Beijing?

But no matter.

With the announcement of the new Indo-Pacific Economic Framework the China hawks and geo-economic strategists have gotten the beginnings of what they wanted. With the war in Ukraine as a backdrop, they will no doubt feel confident they can get the rest.

Most troubling in all of this is whether or not it is even Joe Biden, Jake Sullivan & Co. making these decisions at all. Remember, Obama admitted to being led by the hand, while Trump was beaten into line by Russiagate and a thousand lies and leaks from the departments of State, Defense, and the National Security apparatus. How much of this was Biden being sat down and told what was happening?

Afterall, as the Wall Street Journal broke this fall: Joe Biden was informed upon taking office that the U.S. military had inserted special operators into Taiwan as Trump was leaving office.

It may very well be, as Stephen Walt wrote in his book The Hell of Good Intentions: American Foreign Policy and the Decline of U.S. Primacy, “when it comes to foreign policy, the President is less decider than presider.”

But whether it is Biden or the deep state, the future looks deeply troubling.

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What to Do with War Criminals, Foreign and Domestic

By now everyone has heard or seen it, the thirty-second video clip having been destined to go viral the moment it happened.

In an understandably rare public speaking event at the George W. Bush Institute at Southern Methodist University, the 43 president made a Freudian slip of almost unimaginable proportions: he admitted to being a war criminal.

The moment came at the end of an extended condemnation of Vladimir Putin, his regime, and his war in Ukraine. It was in his condemnation of the last of these that the younger Bush familiarly stumbled, saying out loud what critics of the Second Iraq War have said all along: criticizing the systemized stealing of elections and repression of critics, Bush indicated his belief that it was this system which had led to “the decision of one man to launch a wholly unjustified and brutal invasion of Iraq.”

Dead silence.

“I mean, of Ukraine,” Bush corrected himself.

He gave a laugh and so did the audience.

Bush continued: “Iraq too…Anyway.”

While some in the hypocritical corporate media were quick to express their own disapprobation and condemnation, this in the name of at a war they had screamed for and called traitors everyone who didn’t support it, the rest quietly observed Bush’s humble willingness, after 20 years, to admit that he had been responsible for the unnecessary and criminal deaths of thousands of American soldiers and hundreds of thousands—if not millions—of Iraqis. Together with his disastrous and unnecessary invasion and occupation of Afghanistan—we now know from Donald Rumsfeld’s own papers that the Taliban regime had offered to surrender Osama and itself within weeks of the initial US special operations beginning—the body count Bush Jr. is responsible for is likely some millions, to say nothing of the tens of millions of refugees.


And that is exactly how it looks.

In a country where the politicians are at least nominally carrying out the will of the people, they get to casually mention they destroyed the Middle East under false pretenses to a response of chuckles and collective ethos of “we don’t really care.”

Because it doesn’t matter to them, the political elites. And frankly, to any objective observer it didn’t and doesn’t seem to matter to the great majority of Americans. The American public would have let the war in Afghanistan go on forever, never mentioning the war in their pre-election priorities, and the corporate media collectively going months without even mentioning it. As for Iraq War Two, all the American public really objected to were the American casualties, though this could be attributable to the fact that the corporate media had obediently conjoined the two under the black and white rubric of the War on Terror—which was always an obvious lie, since Sadaam hated and killed every Islamist and Jihadi he could get his hands on.

This isn’t world leadership, not worthy leadership: it is criminal, and Bush has finally made a public acknowledgement of it. However late, however inadequate, it should do.

The path now is clear: charge and hand him over the International Criminal Court at the Hague. That is where war criminals belong - and if we're being completely honest George W. Bush isn't the only living US president of recent memory who should go. 

Whatever else it might do—from encouraging Russians to throw Putin in the docket, to keeping Xi patient over Taiwan—it would at least begin the process of trying to account for the great stain upon the nation George W. Bush and the Congresses that abetted him perpetrated during their time in office.

Of course, many of those who voted for the war are still in Congress—or like perma-hawk Hillary Clinton went on to be Secretary of State and the Democratic nominee for president.

And while Bush gave the order and so should take the blame, no one believes for a second that it wasn’t the decision of his advisors, especially his vice president, Dick Cheney. The fact that those same advisors suffered no great personal loss for their deceptions and miscalculations, but sit comfortably in think tanks, or appear on nightly television news broadcasts to tell us how to fix the current crop of messes their policies created in the first place, is a continuing reminder of the failure of the American people to fulfill what democracy says is its most basic function: public accountability.

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Our Economy Needs a Good Dose of Customer-Driven Deflation

05/21/2022James Anthony

Inflation is created by governments, so the solution to inflation is political. Governments and cronies falsely claim that inflation is good or even necessary, when it’s neither. It’s just best for elites. Deflation, on the other hand, comes naturally when customers are in control, and this customer-driven deflation brings sustainable investment and increased productivity. This is best for everyone.

Government-Created Inflation

Price “stability” (stagnation) or price inflation is caused by inflation of the quantity of government money by government people and cronies.

When money is created by government people, they borrow by creating Treasury bonds. The value that the Treasury people borrow this way is taken and spent right away by politicians to favor cronies. In return, cronies contribute to politicians’ campaigns and get their favored politicians elected.

The interest on the Treasury bonds is paid by taxpayers. The principal of the Treasury bonds keeps getting rolled over into new Treasury bonds and never gets paid back. The value of this principal, along with the value of all other holdings that are denominated in dollars, eventually gets driven to near zero by inflating endlessly. The resulting inflation losses are borne by everyone who uses dollars.

When money is created by government-crony banks, they simultaneously create loan money and loan liabilities, and they loan the money to producers and customers. The fact that loans are easily available sends a false signal to producers that customers have saved money and will spend it later if producers build better processes and products, so producers make investments.

As producers and other borrowers pay back the principal on their loans, the crony banks need to eliminate their liability for this money they created, so as this created money gets repaid, the crony banks destroy it. When producers’ investments come to fruition and the resulting better products are offered for sale, the savings that customers would use to buy these products aren’t there. Such savings never were there. Because of this, some portion of producers’ investments turns out to have been malinvestment. Malinvestment compounds until some producers no longer generate the required interest payments and no longer get propped up by further government-granted privileges or bailouts.

Through money creation these producers’ plants were created, and through money destruction these producers are destroyed. Through this destruction, malinvestment generates crises. In crises as of late, cronies create even-more inflation, which is crisis inflation.

Government-Created Deflation

In crises in earlier times—which also were initiated by inflation of the quantity of money by government people and cronies—crisis deflation of prices has resulted from further actions by government people and cronies.

In exercising their government-granted money-creation privileges, crony banks have circulated money without holding enough reserves to cover all deposits they promise to produce on demand and to cover all bad loans. This system design is not only unconstitutional but also unstable.

Borrowers are subject to competition, and they make mistakes, and they suffer disasters. Borrowers haven’t been able to insure against every problem. Some loans have failed.

In times of such failures, depositors have understandably not trusted that crony banks have had enough reserves to stay open. Some depositors have tried to withdraw their money, creating runs on these banks. Some banks have gone bankrupt. When they have, all the assets they have listed on paper but haven’t backed by reserves have been suddenly destroyed.

This destruction of paper wealth has deflated the total quantity of money. For products to sell, producers have then needed to reduce their prices. This has deflated product prices. When product prices have been deflated, either labor prices (wages) have had to be deflated or jobs have been destroyed. With fewer dollars being used to buy and sell the same products at the same rates, each dollar has become worth more.

In general, the falling nominal wages have ended up sufficient to cover the falling product prices. But for borrowers who have had existing loans, their falling nominal wages haven’t ended up sufficient to cover their unchanged nominal loan payments and principal.

For borrowers, this midstream change in the real values of their loan payments and principal has been a substantial hardship that they didn’t create. For cronies, this change has been a substantial windfall that they, empowered by the government people, did create.

The government people, though, despite having been the root cause of this crisis deflation, haven’t required their cronies to discount the nominal loan payments and principal to make the real values match the real values that both parties had contracted to exchange.

Every borrower who hasn’t been relieved by bankers acting on their own and who hasn’t been relieved by government people restoring the original real terms has been squeezed hard. Some, and oftentimes many, have failed. These failures have left more banks with unanticipated losses, leading depositors to make unanticipated withdrawals, leaving more banks destroyed, multiplying losses much-more widely.

Crisis deflation has enabled government people to greatly ratchet up government. The 2.5-year panic of October 1839 through March 1842 ended the initially small-government Democrats’ plan to systematically greatly-limit government using three presidents over 24 years, destroying that plan after just 12 years. The 1.4‑year recession of January 1893 through June 1894 eliminated the last small-government major party by transforming the Democrats into a big-government party.

Customer-Driven Deflation

Deflation of prices can instead be achieved by keeping the quantity of money constant and leaving individual producers free to increase their productivity. Productivity increases come naturally when savers, investors, producers, and customers act freely.

Savers store up past value-added to be spent later. Saving makes investments sustainable, because when better products are produced by this investment and these loans are paid back, this earned-and-saved money will be available to spend on these products. Saving also increases the sustainable investment and learning and innovation that increase productivity, so the same quantity of money buys more and better products.

Changing over from the current inflationary regime will be simple. All that’s needed is to stop granting crony banks the unconstitutional privilege to use fractional reserves, and to transform crony fractional-reserve banks into value-adding full-reserve banks, with a few simple actions:

  • Repeal banks’ privilege to hold fractional reserves.
  • Create and transfer to banks the quantity of money needed to back all current deposits with full reserves.
  • Transfer ownership of all bank assets to mutual funds. (Transferring ownership from the current owners is appropriate because the current owners are cronies who are accepting the banks’ crony privileges.)
  • Distribute the same fraction of shares in these mutual funds to every citizen. (Some people have had much value taken from them. Other people have been stopped from adding much or any value in the first place. This dispensation provides a simple, reasonable path forward.)

Repeal won’t require government people to administer new scope by promulgating new programs. After these one-time transfers of money and ownership, government people will be required to do nothing.

The Fed was government-spawned to address government-caused panics. But once banks are required to hold in reserve all the money they’re required to pay out on demand, these panics will be fully prevented with no added controls and no accompanying variation, error, and risk.

Savers, investors, producers, and customers will no longer have to readjust their choices in response to the Fed’s every move, in addition to readjusting their choices in response to all the other, smaller changes around them. Savers’, investors’, producers’, and customers’ choices will be more accurate and optimal.

Customers, Freely-Competing Producers, and Voters Unite!

So why haven’t we gotten the government people to make these simple changes before? When the government people make these changes, all the built-up malinvestment won’t be sustainable and must fail.

For the entrenched government people and cronies, such a transition has been a genuine fight to the death of their longstanding way of life. Their unearned advantages over us would end. The cronies’ malinvestments would fail and the failed businesses would be destroyed. To block such change, these elites have constantly pushed out their narratives using every channel they control: academia, most media, and supermajorities of politicians.

But now we know what’s wrong and we know what to do about it. This time when the built-up malinvestment fails, people will again do what people usually do in uncertain times: they will start saving more. This time, though, their savings won’t be undercut by government and crony money-creation that unsustainably lowers interest rates, so this time people will keep saving more. Producers will sustainably create new jobs. Workers will choose those jobs.

What will determine the duration of this initial transition will be the durations of these overlapping initial changes to saving more, creating new jobs, and moving to new jobs. These initial new jobs can be created and filled surprisingly quickly, once enough producers start working to use this transition to their best advantage.

All recoveries’ delays and rates are determined by producers’ choices. In this recovery, producers won’t be awash in inflated money, but producers will be keenly aware of the dawning of a free, new regime. Once government actions are changed for the better, this brings good results that are politically popular, and this popularity helps hold these changes in place.

Opportunities will be everywhere; first-mover advantages will beckon. Like producers did after World War II, producers will move fast. Ongoing development of still-better jobs will proceed at a furious pace.

Price stagnation or price inflation is evidence that governments and cronies are grabbing advantages over us. Crisis deflation in years past was evidence that governments and cronies were taking advantage of us. Customer-driven deflation has been, and will be, evidence that the playing field is level and that customers are in control.

Customer-driven deflation is the economic way that we live better. The best time to get started at living better is always right now.

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Axel Leijonhufvud RIP, 1933–2022

05/20/2022Judy Thommesen

It is with a sad heart that we note the passing of Axel Leijonhufvud on May 2. He wasn't an Austrian (but rather, as a good Swede, a Wicksellian), nor did he like pigeonholes, but he leaves a large legacy that is relevant to the Austrian school. He, much like Roger Garrison, knew more about what Keynes said than most any other scholar, past or present. His dissertation, On Keynesian Economics and the Economics of Keynes, argued that Keynes's General Theory didn't actually deal with sticky wages and prices, but instead with intertemporal coordination failures. He was more interested in out-of-equilibrium processes than in mathematical models of equilibrium, and this led to his advising some of the former republics of the Soviet Union (notably, Kazakhstan) on how to transition to a market economy. He was a gentleman, and a true friend to those who knew him. He will be missed.

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Menacing Headlines Warn: More Pain Ahead

05/20/2022Robert Aro

Tough talk and strong predictions were made by Federal Reserve Chair Jerome Powell this week. CNBC reports that the Fed will continue raising rates until inflation returns to a “healthy level.” In his own words:

We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down. We’ll go to that point. There won’t be any hesitation about that.

He doesn’t note any tangible targets such as what an “appropriate place” is, what barometer is used to gauge the success of bringing prices down, or how long it will take. The Fed will decide when the goal is reached.

Taken literally, if a Federal Funds Rate of 18% is required in order to lower prices to a healthy level, no matter the consequences, much pain lies ahead. Surely there must be a limit on how high the Fed would allow rates to soar. Yet this is not the first time he mentioned this. Last week, CNBC noted Powell warned that increasing interest rates will:

...include some pain...

Whether one is vehemently against central banking’s interventions or, like most people, don’t understand how central banking is truly against the public’s interest, we should all take note.

Afterall, he’s in charge of the money supply and interest rates. His organization is primarily responsible for the inflation we are suffering. It’s an unfortunate realization and it need not be this way. But the Fed serves a dual function of being both the cause and solution to our monetary problems.

A scan across more CNBC news headlines show a similar theme of doom and gloom:

Dow drops 1,100 points for its biggest decline since 2020 as the sell-off this year on Wall Street intensifies

The article addresses that this was the fifth time this year the Dow fell more than 800 points.

But that’s just stock market news. The food situation overseas is something we must also closely monitor, as headlines from the UK reveal:

Skipping meals and shrinking portions — Brits are being warned of ‘apocalyptic’ food price rises

Between higher prices, smaller portions and/or food shortages, we can only hope such “apocalyptic” pain will not come to our shores. So far, other than the shortage of infant formula recently seen in America, food shortages are something most Americans have never experienced.

Should things not go according to plan, perhaps we can learn from those in the UK whose inflation crisis seems more advanced than ours:

A quarter of Britons have resorted to skipping meals as inflationary pressures and a worsening food crisis conflate…

When Powell warns of pain ahead, as much as we may want to, now is not the time to doubt.

It’s difficult to say what the most painful outcome would be. But a future with high rates concurrent with high inflation could be one of the worst. There will be no easy way out of this.

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A Renewed, Libertarian America: What Must Be Done

05/19/2022Archie Richards

The following policies would result is a more peaceful and equitable society:

-- Federal legislators are limited to one term each, with much reduced pay. Senatorial terms are cut from 6 years to 4. These changes would make Congress less responsive to constituent demands, inducing people to meet more of their needs in the private sector. After the government incurs a deficit, the remuneration of legislators and administrators is reduced during the year that follows. Judges are limited to ten-year terms.

-- The government is isolationist. The U.S. State Department and its embassies are abolished. The U.S. leaves the United Nations and requires the United Nations to leave the United States. The U.S. defends the nation from military and electronic incursions only from Mexico, Canada, the sea, the air, and from space. Its navy stops patrolling the world’s oceans.

-- Private-sector Americans, including those engaged in trade, tourism, and private foreign aid, may be as interventionist as they please. Military weapons owned by private parties may be stored in America for use by them elsewhere. The U.S. government does not ensure the safety of its citizens abroad.

-- The Federal Reserve Bank is abolished. Attempts by anyone, never mind a government agency, to regulate the economy cannot help but make things worse. The Fed has greatly increased economic volatility, making life especially hard on the poor during downturns. Keeping interest rates low increases the value of assets. Since most assets are owned by the prosperous, wealth has become ever more unequal. The government’s monopoly over the dollar is removed. Anything may serve as a currency. Currencies are freely exchangeable, allowing the people to choose which ones are most convenient and best hold their value.

-- The Civil Service System is abolished. The former spoils system did little damage and created far less incentive to expand government.

-- The premiums for health insurance are low, since policyholders pay all of their medical costs up to the year’s substantial deductible. Policyholders thereby become familiar with healthcare costs, and competition between suppliers drives the costs way down. After a person’s deductible is spent, the insurance company covers all health costs. Younger people leave most of their deductibles unspent.

-- Government has nothing to do with education. Many government schools are poor, especially in low-income areas, and universities are replete with idiotic notions. All schools are owned privately, for profit or non-profit. With taxes lowered, the prosperous would likely compete as to who can provide the most help to central-city schools.

-- Government stops gathering statistics, because the statistics induce the government to try to solve problems, and most such solutions make things worse. Statistics are collected and paid for by the private sector.

-- Bank deposit insurance is terminated. The guarantees have caused depositors to care about the rate of interest and the convenience, but not the money’s safety – a partial cause of the nation’s enormous expansion of debt.

-- Government zoning impedes free markets and is abolished.

-- Federal laws that support unions are repealed. The interaction between employees and employers is none of the government’s business. Workers can unionize, but without government backing.

-- Government’s flood insurance with excessively low premiums is terminated. When floods occur, the costs are spread among all the people or added to the debt. The benefits to the few seacoast dwellers are substantial and obvious. The per-capita costs to the many Americans are small and hidden.

-- The Jones Act restricts American shipping and imposes significant costs on Americans. It is abolished.

-- The government stops paying farmers for staple commodities, especially corn. The subsidies have lowered consumer costs of staple commodities and contributed to widespread obesity. 

-- Drug testing is not performed by the government. Bureaucrats avoid blame by keeping effective drugs off the market longer than necessary. More lives are lost from the delays than are saved by ensuring the drugs are safe.

-- Government funding of scientific developments has politicized science and is terminated. Scientific development is funded exclusively by the private sector, partly in concert with the military.

-- All tariffs and impediments to trade are repealed. Nations that do not impede international trade are more prosperous and more equitable.

-- Gun controls prevent good people from owning guns. Bad people obtain them anyway. Gun controls therefore make things worse and are abolished.

-- Government does nothing about viruses. Corrective measures, if any, are taken within the private sector.

-- The forfeiture of privately-owned assets to benefit police departments is terminated.

Dynamics of Government

Like everyone else, government bureaucrats act in their own best interests. Having no profits, they measure their self-worth by expanding their budgets, avoiding blame, and increasing their power over others. They generally avoid actually solving problems, because doing so would render their jobs unnecessary. Government’s principal objective is to expand its reach and power. With few exceptions, government is the worst and most expensive way to do anything.

With big government, the rich gain wealth faster than the poor, because legislators reward the rich for their campaign gifts. With small government, the poor gain wealth faster than the rich, probably because they’re willing to work harder.

Media stories about government are newsworthy. But unless wrongdoing or sex is involved, stories about individuals going about their private affairs are not newsworthy, since they usually affect only the individual involved. The media’s natural inclination to favor government is a danger to society and is partly corrected by education.

Police Funding

Providing the following provisions are first enacted, the funding of police departments is much reduced:

-- Members of the public may carry weapons, hidden or not, without licenses. The public would largely police itself, as occurred successfully in the 19th Century. Trying to prevent unbalanced people from owning guns is the job of the private sector, not government. 

-- The disastrous war against drugs is terminated. Drugs are treated as medical problems, not crimes, and information about drugs is taught in schools.

-- Prostitution is legalized. What people choose to do with their bodies is none of the government’s business.

-- Since unions try to prevent bad cops from being fired, police departments may not unionize.

-- Businesses that fail to obtain suitable property and casualty insurance cannot obtain financing. Insurance companies coordinate with banks and finance companies to determine the proper conditions.

-- Cameras at intersections are operated by a consortium of insurers. If a car has not stopped appropriately, the owner is automatically sent a ticket and notified that his auto insurance premiums have been raised. 

The Federal Debt

The default of at least a portion of the federal debt is closer than people realize. If the cost of carrying the debt rises even to the current rate of inflation, it would crowd out current expenses and force at least a partial government default.

The federal government owns 28% of the nation’s land and almost $5 billion of gold. It should transfer these assets to private parties in return for their accepting portions of the nation’s debts. Rivers, inland waterways, lakes, swamps, aquifers, mountains, forests, prairies, deserts, tundra, roads, highways, bridges, dams, reservoirs, the national parks, and the 12-mile band of ocean that rings the nation could all be exchanged for debt relief. Amtrak, urban transportation, airports, and the postal service should all be privatized.

The owners of the Mississippi and Missouri Rivers, for example, could earn money from those who use the waters for irrigation, transportation, manufacturing, fishing, drinking, and recreation. After Congress decides the extent of liability by the owners for floods, the values of these rivers would be sky-high.

Policies that Especially Hurt the Poor

The following government policies make life more difficult and more expensive for the poor and are terminated:

-- Government lotteries are advertised heavily in poor areas, encouraging people to treat them as investments, not entertainment. The lotteries create gambling addictions and breed poverty.

-- Used automobiles are bargains. The prosperous pay heavily to buy new cars. The non-prosperous underpay to buy them subsequently. This substantial, non-governmental, income-transfer program operates now because government interferes relatively little with automobile marketing. But land-use, building, banking, environmental, farming, mining, water, tax, and who knows what other laws interfere with real estate sales, preventing a much larger income-transfer program from operating with housing.

-- Occupational licenses require fees and long periods of training, restricting the number of people in the professions. The resulting shortage of workers elevates the prices of their products. The poor can’t afford the fees and expensive training to join the professions, but they pay the higher prices when they buy the products.

-- Rent control enables older, relatively prosperous tenants whose lives are stable to enjoy low rents. But after they vacate the apartments, the rents are raised. The higher rents are paid by younger, less prosperous people who move frequently.

-- Many small businesses are exempt from paying minimum wages. After government requires larger companies to raise minimum wages, the number of employees who begin being paid below the minimum greatly outnumber those who enjoy the higher minimum wages.

-- Regulations often raise child-care costs beyond the reach of lower-income parents, preventing them from obtaining jobs.

-- The Social Security system transfers money from workers to retirees and holds no investment reserves. With the number of retirees growing faster than the number of workers, the system is certain to fail.

-- The life expectancy of black men is shorter than that of white women. Since Social Security benefits terminate when a person dies, the FICA taxes paid by black men support white women, but not the other way around.

-- Anti-gouging laws force down the prices of products during emergencies, reducing the supply of the products, especially in poor areas.

-- Taxing the rich at high tax rates hurts the poor, because the rich have less money available to create jobs.

Without government holding them down, the poor would pull themselves out of poverty. Any social safety net that’s necessary would be supplied by the private sector.

Government’s Proper Duties

The long-term results of the following government duties are beneficial:

-- The federal government defends the nation and sets and enforces immigration policies.

-- The states set and enforce election laws.

-- Local and state governments enact basic laws, keeping people from hurting others by force or fraud. They are backed by the police, the armed citizenry, and the courts. The owners of roads and other infrastructures furnish their own police forces.

-- The enforcement of contracts and adjudication of lawsuits are discharged by the courts to the extent those issues are not resolved by mediators.


Most laws and government regulations cause long-term harm. The government sector therefore constitutes less than 5% of the GDP.

Since the government sector has grown during most of the years since 1900, the long term has come home to roost, making the nation more and more dysfunctional. Government’s increasing use of force induces increasing violence among the people.

The private sector creates a solution whenever there’s a purchase and sale – literally billions of times a day. On all such occasions, the buyers and the sellers feel that they benefit.

Transactions expected to be beneficial may of course turn out to be mistakes. Some people make more mistakes than others. The only solution is the individual’s effort and learning.

Since government resists change, the only solution for its mistakes is to make government much, much smaller.

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Language and Political Symbolism As a Libertarian Strategy

05/19/2022Andreas Granath

The use of symbols and language to spread ideologies have been practiced for thousands of years. The first symbols to represent ideas were religious ones and were used to spread the teachings of deities. During the 19th century political symbols started to emerge and today almost every political party and ideology has its own. Symbols share the same advantage as pictures - namely, they are worth a thousand words. It is through repeated viewing that symbols serve their purpose.

It does not matter whether the viewers know what the symbols represent or not. Should they know the meaning of a symbol and agree with what it represents it would most likely fortify their beliefs. For those who do not agree with what the symbol represents it could change their minds or at least make them getting used to it. If the viewers are not familiar with a particular symbol, then in some cases it can awaken a certain curiosity which ultimately could change their minds. So, symbols are very much like company logos; they are used for marketing.

The development of language is derived from human action and has been influenced by various cultures. Each culture has developed their own type of language as a reflection of that culture. The relationship between culture and language goes both ways: culture affects the use of language and vice versa. Language and the use of words have a powerful impact on our lives and perception of the natural and social world around us.

Historical and Present Day Usage

Some of the most familiar political symbols is the swastika. It originates from Asia and is used as a symbol for luck or for the sun. In the West we know the 45° rotated version of it as a symbol for National Socialism (Nazism). What many people don't know, is that the Nazis also took control over the German language using euphemisms and slogans. A mass-murder operation, for instance, was called aktion meaning 'action'. 

Though the political agenda has swung and mass murder of certain people is no longer on the agenda, we see the same things happening today on a whole new level. In Sweden, where I live, left wing egalitarians started to take control over the use of Swedish during the early 2010s. The rainbow flag and female gender symbol were heavily adopted during this period and are increasing in popularity.

Regarding the use of language, there are lots of words in the Swedish language which have been almost banned to fit the egalitarian view. The Swedish spelling dictionary Svenska Akademiens Ordlista (SAOL) is gaining new egalitarian words to its glossary each year and losing older "less including" and "negative" words. The most discussed new word in Swedish is the gender-neutral personal pronoun hen. Up until recently, we would use han, meaning 'he', and hon, meaning 'she'. Even though Swedes still use the words for 'he' and 'she' the gender-neutral hen is being used more frequently. Especially in mainstream media and woke circles.

What Libertarians Can Learn

Symbols and words are proven to be powerful tools and I strongly advocate that libertarians use these as well. Unfortunately, libertarianism does not have a specific symbol. Although, not originally a libertarian symbol, the Gadsden flag has been adopted by many libertarians and is perhaps the most used and recognized symbol for libertarianism.

Like any other political ideology, libertarianism has its different types. Thus, the anarcho-capitalist flag and the agorist a3 symbol may also be used. The question is, does libertarianism need its own symbol or should we stick to the good old Gadsden flag? Since the Gadsden flag is already associated with libertarianism, it has an advantage over a potential new symbol. However, the Gadsden flag is a rather complex symbol to either draw by hand or make jewelry, such as pendants out of. A new symbol, therefore, could come in handy.

As of language and semantics, I think libertarians should brush up their vocabulary and call things for what they are. I will present a few suggestions for what libertarians can do to improve their rhetoric and everyday speech.

First of all, there is no private sector existing other than in the black markets. The private sector as most people know it, is merely pseudo-private since it is heavily regulated and taxed.

Second, a proper use of the term ownership is needed to make non-libertarians understand the meaning of true ownership. Libertarians share a sound understanding of what ownership is. Thus, we recognize that there is no such thing as common ownership. Again, call it by its name; common utilization. Our public enemy number one, the state, deserves a more suitable name like the mob or the monopoly on violence/force.

Lastly, I want to challenge libertarians and Austrians to avoid using the term capitalism. Over the years, the term has gotten so misinterpretated and negatively used that there is no gain in using it. We must also recognize that we live in a mixed economy, and that there is no true capitalism in any country at this day. I propose using the terms free market, laissez-faire or voluntary exchange (market) when talking about true capitalism.

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It Is Time to Rethink the Policies of Invoking Government Nudges

05/19/2022Vijay Victor

There has been a lot of buzz going on about nudges ever since Thaler and Sunstein popularized the concept in their book “Nudge: Improving Decisions About Health, Wealth, and Happiness” published in 2008. Nudges are basically subtle suggestions or motivations devised to change people’s behavior without denying them the freedom to make own decisions. Thaler and Sunstein define nudges as:

Any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.

In the absence of evidence-based treatments and vaccines, behavioral nudges were expected to help in encouraging people to maintain social distance, wearing masks, debunking conspiracy theories at the start of the pandemic. Many governments and independent organizations funded projects to devise and study nudges that could bring in a desirable behavior.

Several studies have been conducted across the world to assess the effectiveness of nudges in a pandemic situation. Many of them reported that nudges were not as effective as expected in bringing out a desirable behavior. Informational nudges like pamphlets, text messages etc. seemed to have increased the hand washing habits of people by two percent and the willingness to wear masks by three percent in countries like Columbia and Brazil. Framing messages in loss or gain frame did not seem to have a major impact on deciding the need for and the length of lockdowns in the UK. Similar results were found in a study conducted in the Netherlands to motivate people to maintain hand hygiene in shopping streets. The study concluded as follows:

Our results suggest that stores, and governments, should look for other measures than the tested nudges to improve hand hygiene in the shopping street during the COVID-19 pandemic, either combining different nudges and/or using less subtle methods. 

Keeping aside the ‘replication crisis’ in the fields of psychology and economics, there are several reasons why nudges don’t work. One major reason could be attributed to the psychological barriers created by the cultural and contextual features of different countries, locations, and groups. Generalizing the results of studies without ‘context reconnaissance’1 would yield bad results.

It is almost impossible to devise umbrella nudges or interventions that would fit everywhere. To put this into perspective, consider the reasons for vaccine hesitancy in Africa. Years of war and Ebola outbreaks increased the distrust in the products from the west. Along with this, local health beliefs that differ from region to region play a major role in increasing vaccine hesitancy. A single nudge would not be of much help here. This necessitates the need for customized or rather tailor-made interventions that are region specific; homogeneous groups or at least groups with similar traits must be identified. Generalizing the application of nudges or interventions for regions with similar characteristics may also not work. It is quite possible that we overlook the underlying heterogeneity in the groups considered. After all, many social phenomena are inseparably intertwined.

Having said this, one should not exaggerate the effectiveness of nudges in a precarious pandemic situation like this. The effect sizes of the studies cited above indicate that nudges alone are not enough as in the case of organ donation or retirement plans where we observed significant changes. Many governments believe that instead of forcing people to exhibit a desirable behavior, they could just ‘nudge’ them. ‘What is considered as desirable behavior and who decides it’ will take us to the classic debate of libertarian paternalism and its oxymoronic nature.

Thaler himself suggested that the governments should opt for sterner measures like vaccine passports instead of solely relying upon nudges to get people vaccinated. We need the right mix of soft and hard interventions which Thaler calls ‘pushes and shoves’ to motivate people to take vaccines. The sheer simplicity and subtle nature of nudges may make them appear like magic potion to the politicians. It is high time that we realize the actual effectiveness of these interventions and use our limited resources judiciously. As a closing note, here is the conclusion of a paper published in Nature by a group of prominent behavioral scientists written in response to the overuse of half cooked behavioral interventions.

On balance, we hold the view that the social and behavioral sciences have the potential to help us better understand our world. However, we are less sanguine about whether many areas of social and behavioral sciences are mature enough to provide such understanding, particularly when considering life-and-death issues like a pandemic.



Positive results – framing: Nudges for COVID-19 voluntary vaccination: How to explain peer information?

Weijers, R. J., & de Koning, B. B. (2021). Nudging to increase hand hygiene during the COVID-19 pandemic: A field experiment. Canadian Journal of Behavioural Science / Revue canadienne des sciences du comportement, 53(3), 353-357.

A megastudy of text-based nudges encouraging patients to get vaccinated at an upcoming doctor's appointment,

Use caution when applying behavioural science to policy -

How effective is nudging? A quantitative review on the effect sizes and limits of empirical nudging studies,

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How Efficient Is the Market, Really? Challenging the Chicago Hypotheses

In 2008 Warren Buffett issued a public challenge to the industry he most despised: hedge funds. Charging its clients 2% of assets under management plus 20% of any profits, Buffett wagered none of them could beat the annual return of the S&P 500. That bet was accepted, and ten years later the token wager of one million dollars was duly paid to the charity of Buffett’s choice.

Below is a graph depicting the results of the participating funds against the returns of an S&P 500 Index:

While it is true that the period in question featured an historical bull market, reaching back into the data and the history of major market participants reveals that the same would have been true at almost any point in the last forty years. Only a handful of investors, a literal handful, have been able to beat the market for their clients in the long run after fees and transaction costs are considered. Buffett, himself on that list, is so confident in the superiority of investing in broad-based index funds that he is said to be leaving the majority of his estate in them for his wife.

Other wealthy investors have taken note, with the share of assets under hedge fund management falling over the past five years.

While the commissions and fees hedge funds charge are large, what explains the basic inability of the average fund, staffed by ivy league quants doing cutting edge analysis running state of the art software, to significantly beat the market over the long run?

The answer, at its core, is the Efficient Market Hypothesis.

In the words of its author, Chicago School economist Eugene Fama (1970), the Efficient Market Hypothesis (EMH) is the belief that “prices reflect all available market information.” The implication being that, if they didn’t, arbitrage opportunities would arise, and prices would be corrected by those large investors with the resources to identify and make such corrections. The focus of the theory, therefore, is on information and its impact on prices.

EMH makes four basic assumptions: rationality, risk aversion, responsiveness to new information, and some amount of randomly distributed error (aka Malkiel’s “Random Walk”). Further, it takes three generally accepted forms:

  • Weak-Form Efficient: above market returns cannot be gained from past market data (aka: technical analysis), but can be had from some kinds of fundamental analysis.
  • Semi-Strong-Form Efficient: prices reflect all publicly available information. Prices will only change with new information, the emergence of which is assumed to be more or less random (thereby negating any prospect of above market returns via fundamental analysis).
  • Strong-form Efficient: even with access to insider information an investor cannot beat the market.

Immediately, one can see that the strong-form of the EMH cannot possibly be true. Insider trading is illegal for a reason, and deals like Berkshire’s recent purchase of a large stake in videogame company Activision immediately before it was announced the company would be acquired by Microsoft raise eyebrows.

Between the weak and semi-strong forms, however, there is a lot of gray area. And many economists since the 1980s, including the Yale’s Robert Shiller and Chicago’s Richard Thaler, have made arguably the largest contributions of their careers studying the various ways in which markets apparently misbehave according to the various forms of the EMH.

To take a few examples, seasonal effects defy even the weak form of the EMH. The so-called Santa Clause rally is perhaps the best known of these phenomenon. Regardless of the wider macroeconomic conditions, market momentum, or exogenous risks, investing strictly on the basis of calendar dates, from the last five trading days in December through the first of the new year, has yielded a return 75% of the time. From a statistical standpoint, this is improbable, though several rather mundane facts may explain the anomaly: equities are generally at a cyclically lower level to start December due to tax reasons, professional traders being on vacation makes for lighter volume and fewer short sellers, and purchases in anticipation of another observed historical tendency, the January Effect.

In his analysis of P/E ratios, Shiller provides possibly the strongest evidence against the semi-strong-form EMH:

What he found was that buying and holding companies with relatively lower P/E ratios over the long-term produced the highest returns over those periods – something fundamental analysis and projections of future earnings could contribute to optimizing.

As pioneers in behavioral and narrative economics, both Thaler and Shiller also believe that the stories we tell ourselves about the stock market matter – how much, they can’t quantify. So, too, that systemic biases in thinking, such as the herd effect and hot hand fallacy, can drive market action in ways EMH would not predict – such as the 1990s IPO tech bubble, the rise of the cryptoverse, the implosion of LTCM, or the London Whale.

As far as bubbles go, Shiller correctly forecast both the tech bust in the late 1990s and the ticking time bomb in the housing market in the mid-2000s. But it is worth noting that while in retrospect everyone admits prices of mortgage backed securities were mispriced in accordance with their actual level of risk for several years in the mid-2000s, it was impossible to convince anyone of that at the time. Indeed, Thaler admits that while bubbles exist, we can really only prove they were bubbles after the fact. Afterall, there were plenty of buyers in every case, and who was anyone to say for certain that the future wasn’t going to be radically different from the past? Or that buying equities whose prices were rising wasn’t rational and efficient, value being subjective? Afterall, what is the value of something if not what amount it trades for between informed market participants freely exchanging?

Under such circumstances, an investor who thought they had identified such an inefficiency in the market and sought to profit from it by going short might wind up running out of money before the market ran out of enthusiasm: as with George Soros in the 1990s and tech.

Shorting being both risky and expensive, in such circumstances the great irony is that the rational thing to do for the average participant from a game theoretical standpoint is to ape the market and go along for the ride – hopefully using their self-awareness of actual risk levels to jump ship at some point before the crash.

It seems clear that between a combination of momentum trading, innovative strategies, superior analysis, high frequency trading for momentary and infinitesimal price arbitraging opportunities, and guessing correctly at future trends, can lead some firms to obtain above market returns. However, once fees and expenses are considered, the actual return to investors has been below the market average. Furthermore, virtually no funds or managers are able to sustain above market returns over the long run.

There have, of course, been periods where this was not true. The first decade of the 2000s as well as the ten years between 1965-1975 would have seen buyers of the S&P 500 index suffer a slight loss, while investor at the most successful funds of their time would have shown a positive return.

All things considered, for the average person planning for retirement, assuming they have neither the time or training to do the level of due diligence and analysis required for making superior individual stock selections, they really have been best off buying and holding broad based index funds rather than trusting to expensive, and often wrong, “experts.”

Whether or not this will continue to be true over the next several years, only time will tell.

As George Bragues argued in the QJAE in 2014, the data clearly reveals markets behave irrationally at times with respect to prices, earnings, dividends, acquisitions, et cetera; however, the market is not irrational either in that it is gradually self-correcting, bubbles are difficult to spot, and even more difficult to time.

Building on Shostak’s critique of Markowitz’s Modern Portfolio Theory, what this means for the efficient Austrian portfolio will be the subject of another discussion.

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