Austrian Enginomics begins with the requirement to experience a paradigm metamorphosis.  One must perform a virtual self-lobotomy to remove reference to the US dollar, a fiat currency, as the basis of economic or wealth measurement.  “Enginomic” logic is committed to recognizing, analyzing, and measuring the “real economy” in contrast to the “financial economy”.  For example, the US fiat dollar is not viewed as wealth within the context of Enginomics.  If the quantity of dollars (or data bits in a computer representing dollars) instantly doubled, we would not be any wealthier in aggregate.  We would simply have twice the quantity of fiat currency chasing precisely the same amount of wealth, thus doubling inflation.  At best, fiat currency represents a contract to ACQUIRE wealth.

The enginomic logic is designed to develop and track two significant macro economic “health” indicators.  The two indicators are:

1. Aggregate asset (stocks, bonds, and real estate) overvaluation “bubbles”, and
2. Percentage of labor resources employed in “market unjustified” business enterprises vs. “market justified” enterprises.

Enginomics recognizes the pervasive ongoing valuation distortions and mixed market signals that result from inflationary monetary policies.  A nation or group of nations can muttle through life under a relatively constant inflationary condition continually rewarding some groups at the expense of others and driving some measure of misdirected, unjustified business activity.  However, the system instability associated with extreme conditions within an economic sphere related to the two key Enginomic metrics noted above is an order of magnitude more severe.  When the said conditions are extreme, there is no amount of monetary or interest rate manipulation that will mitigate the extreme out of balance conditions.  At best the monetary machinations will attempt to create yet another illusion to mask the existing illusion.

Many economists believe the current (May 2005) cycle of interest rate tightening will be the cause of the economy eventually “breaking” and sinking into a recession or worse.  Enginomics (and Austrian economic theory) recognizes the root cause of any upcoming economic downturn was the financial bubble creation in the first place; NOT the series of interest rate increases.  The current series of post-root-cause central bank interest rate increases are belated attempts to correct a problem they created in the first place by the extended artificial suppression of interest rates and administration of easy monetary policy operations.

For example, if we are experiencing an extreme bubble in real estate values, then there are only two means of correcting or diffusing the bubble once discovered by the masses.  First is by further debasement of our currency (inflation).  Second is by devaluation.  Of course, a combination of the two is possible.  In either case the property owner will realize the real valuation of his property is much less than originally perceived before the bubble illusion discovery.  Once the bubble is formed , imminent damage is irreversible.  The precursor to the damage is complete.  Curious questions remaining are the timing and abruptness of the correction.  Once the illusion is discovered, the momentum of bubble expansion is typically still worsening, and reaching a blow-off stage.  Informed or contrarian investors will already be in process of an investment strategy reversal betting upon a housing valuation collapse. 

Most economists believe any out-of-balance economic condition can be mitigated by corrective monetary policy.  e.g. Ben Bernanke’s promise of “helicopter money” to combat a persistent deflationary tendency.  Unfortunately, this effort will only prolong and worsen the out-of-balance conditions.

Any investor owning an asset has a traditional logical method of projecting its future buying power.  His belief is that his asset or real estate equity represents the power to acquire a measured real “future stream of goods and services” by thinking in terms of dollars.  If the investor envisages a $100,000 investment today having the buying power of three future Lexus 300 sedans over the next 9 years, and he suddenly learns the $100K is 100% overvalued, thus only having the effective buying power for one and one half Lexus sedans over the same time period, all the money that Ben can print and drop from the sky will not change the reality of a 100% bubble illusion.  More devalued currency will not empower acquisition of a greater future stream of goods and services. There is no such monetary policy that will effectively increase the “real” future stream of goods and services produced by our aggregate business enterprise.

The “Enginomic Story” attempts to help guide the distinct recognition of the “real economy” in contrast to the “financial economy” that monetary and government authorities would like you to believe.  Governments cannot make promises to expand the “real economy”.  Only enabled entrepreneurs and their employees can accomplish such.  Government can only control and directly influence expansion of the “financial economy”, which enables them to stay in power.  Sovereign nations risk loss of identity and destruction, when faith in leadership and money deteriorate.  Unfortunately, asset bubbles and misallocation of resources are very popular in the formative stage, but they become very painful and abrupt in the discovery and correction stages.

Timing of the inevitable “Day of Reckoning” is relatively straightforward.  You may look forward to future articles that present this logic.

I am clearly promoting our return to a commodity based monetary system and preservation of the Republic.  I look forward to your support…!

by Russ Randall (5-13-2005)

Should We Celebrate Consumption Profligacy?

Absolutely not…!   Yet we commonly see economists commenting:  “…The consumer represents 2/3’s of the economy.  Therefore, we must ensure they keep spending as much or more to support the overall economy…”.

Let us draw an analogy to a human breathing.  We know that inhaling is approximately half of the breathing function to sustain life.  Further, we know it is equally important to exhale approximately an equal volume of air.  If we simply focused upon the importance of the inhaling function, and declared that it is good and healthy, then why wouldn’t more be better?  Could we inhale more air to make up for exhaling less air?  Could we inhale a little more air with each breath without exhaling more air?  What is likely to occur?

Consumer spending is a critical component of any capitalistic system as is inhaling within a human biological system.  However, there must be a balance in the system such that one component does not consume a proportionally greater share of resources than it would otherwise in a free-market state.  If we are in a condition where the consumer is “holding up the economy” by spending more, then there is quadruple danger:

1. Resources are drawn away from capital goods, R&D, or infrastructure investment, and devoted to producing and retailing consumer goods.  Ultimately those resources will need to be fired and return to the aforementioned areas.  Otherwise, future productivity will be stifled, and capital equipment investment and infrastructure refurbishment or expansion will fall behind.
2. The consumers are enticed into this higher proportion of spending (rather than saving) by artificially suppressed interest rates and “easy money policies”.  This enticement encourages higher unsustainable debt levels, which will unlikely be repaid in real terms.  Eventually, rebalancing will occur via default, bankruptcy, or inflation.  Creditors, and holders of dollars and dollar-based assets will become the losers.
3. Companies responding to the noted “easy money policies” will invest in ventures that would normally not be justified, which Austrian economists identify as “malinvestment”.  Further, new companies are formed for the same “non market-justified” reason.  Once the “easy money” conditions return to “natural market” conditions, most all of these “malinvestments” will go bust.
4. We further exacerbate the foreign trade imbalance.  When consumers disproportionately consume rather than save, it encourages increased consumption of all goods including foreign.  The longer this economically imbalanced state exists, the further the U.S. will fall behind on the vital productivity investments into “market justified” businesses.  We also create a near impossible obligation to repay our trading partners in real terms.

The most important contribution our Central Bank and government could make in this regard is to refrain from policy incentives that discourage the necessary free-market adjustments, which maintain balance in our capitalistic economy.  If we’re not inhaling enough air, then we must exhale a bit less, until that which is out of alignment becomes adjusted, then resume to normal breathing.

Unfortunately, our Central Bank in concert with financial institutions have embarked upon the greatest “easy money policies” during the past ten years than any equivalent time period in the history of our Republic.  The resulting imbalances are equally as extreme.  I anticipate the rebalancing correction will occur during the 2008-10 time frame when the Boomers begin retiring en mass… or sooner….  Fasten your seat belts…! 

                                                by Russell Randall; 9-28-2005

Never in the history of the Republic!

Never in the history of the Republic has a former Chairman of the Federal Reserve Bank stated:  “…Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.  What really concerns me is that there seems to be so little willingness or capacity to do much about it…” ⁽¹⁾

Never in the history of the Republic have we completely abandoned a commodity-backed U.S. dollar until 1971 when President Nixon “nixed” the Bretton Woods agreement.  Monetary policies since 1971 have been relentlessly debasing our currency and creating larger and larger illusory values of wealth (bubbles) along with modest fractional corrections along the way.

Never in the history of the Republic has the broadly recognized most successful investor ⁽²⁾ of all time bet such a significant percentage of his investment wealth AGAINST the dollar.  From Forbes.com:  “…Warren Buffett….  …Sitting on $43 billion in cash, hoped to make some big acquisitions last year, "but I struck out." Instead, invested in foreign currencies: $21 billion bet against the dollar and in favor of various other currencies…”⁽²⁾

Never in the history of the Republic have we been as “flat footed” and complacent in preparing for a diminishing supply of energy resources.  The current crude oil supply constraint debacle has been building for some time.  There has always been a finite limit of crude available, yet a persistently growing global appetite, especially from China and India.  “Strong Dollar” policies in the late 90’s effectively delayed the day of reckoning for the fuel price shock we are experiencing today.  Had we been on a gold backed currency and allowed market forces to transmit supply and demand messages all along, the pricing of oil would have risen sooner and more gradually.  We are now saturated with millions of gas guzzling vehicles and our factories are primarily equipped to produce thousands more.  Also, we are still expanding the geographically spread-out large-house suburban lifestyle, as thought there will be an ever-flowing supply of inexpensive energy resources.

Never in the history of the Republic have we given foreign countries more reason to engender a hostile anti-American posture due to our political ambition to control the world supply of oil.  The U.S. “Empire” has clearly embarked on a strategy attempting to control oil supplies along with the associated political regimes.  The notion of allowing a free market to determine appropriately matched buyers and sellers is secondary. 

Ironically, an unstable oil producing country may be doing us a favor long term.  According to “Peak Oil” analysts, we are near passing the 50% consumption point of all available oil on earth.  Regardless of the exact timing for this phenomenon, the price will quickly become prohibitive in the next few years, which will finally force behavioral changes in most every facet of our lives notwithstanding a historic technological breakthrough.  It would be better to experience this transition in a gradual albeit expeditious manner rather than experience a shock and probable wars over something we must learn to live without in time anyway.  What’s the difference, if we run out of oil in 2050 vs. 2055?  Why risk such hostility and likely worldwide conflict over something that won’t prevalently exist in a few years?  Would not a race to a technological innovation be more inspiring and constructive than a race to gain exclusive sourcing, transportation, refinement, and political control of oil sources?

Never in the history of the Republic have we consumed beyond our means to such a catastrophic level.  We are now experiencing current account trade deficits over 6% of our GDP.  At that rate foreign trading partners could effectively control our entire business asset base in less than 11 years.  For an advanced industrialized country to exchange “paper” for real goods and services at this level is an abomination of common sense. 

Never in the history of the Republic have we experienced a larger stock market bubble than in the 1995-2000 period.  That period of illusion encouraged every individual, company, and government entity at all levels to systemically incorporate expanded spending, consumption, and benefits into their future plans as though it would never end!  That illusion of wealth placed tremendous pressure on governments at every level to mitigate the inevitable semi-bust that followed.  The result…?  Our Central Bank embarked upon the most expansive monetary policy in history and our federal government passed the largest tax cuts in history, which managed to keep the stock bubble from rightfully correcting to its “free-market” level, AND to boot… we’ve created the largest Real Estate, and bond bubbles in our history.  The result is an unprecedented historic aggregate illusion of wealth, which I calculate to be $27 trillion or a 40% aggregate overvaluation ⁽³⁾.

Never in the history of the Republic did we create such a powerful gradient of financial force to create non-market justified business ventures during the noted 1995-2000 period.  These ventures attracted massive talent pool shifts into companies that can only survive under expansionary artificially suppressed low-interest conditions.  Unfortunately, when “real” interest rates return to “market” levels, people associated with those ventures will be jobless looking for work.

When will we “discover” this illusion?

As an expanded critical mass of creditors holding the inflated assets begin to leave the work force and “cash out” expecting to enjoy their planned future stream of goods and service consumption, the true output of the U.S. “economic engine” will become visible.  The noted “critical mass” is Boomers all over the world.  Therefore, expect significant asset devaluation or currency debasement (hyper-inflation) beginning in the 2008-2010 time period OR SOONER….

P.S.   It’s not the $300 Billion war, the $200 billion hurricane disasters, the $160 billion oil shock, or greed or capitalism…!  It’s the $20+ TRILLION aggregate bubble created by our poisonous, addictive expansionary monetary policy… !

However, I’m VERY OPTIMISTIC…!

I’m optimistic the logic from “Austrian Enginomics” and similar analyses will help guide us back to a gold-based currency after the economic collapse, which will enable a healthy, long-lasting recovery, and help to ensure the preservation of our Republic…!

                                                            By Russell Randall; 10-4-2005

1)      Paul Volker, chairman of the Federal Reserve from 1979 to 1987, on Sunday, April 10, 2005  at an economic summit sponsored by the Stanford Institute for Economic Policy Research.

2)      Forbes.com; “#2 Warren Edward Buffet” article referencing 2004

3)      See graphs in the following article: http://austrianenginomics.com/ItstheEconomyStupidRevB.pdf