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Comment by sharpneli | Hacker News Reader

"Furthermore, inflation is not simply an increase in the supply of money within an economy; it is the increase in that portion (if any) not backed by a commensurate increase in specie: most common in history, market commodities like gold or silver. "

Either the author of that article is misenterpreting, I am misinterpreting or Austrian school of Economics is tad stupid. I'm hoping that the one at fault here is me.

Basically even with increase of the amount of gold or silver you'd still get inflation, check what happened with Spain at 1500 or so when they got a huge influx of gold from the new world.

You can also imagine what would happen if suddenly we'd get huge influx of new gold. As the amount of stuff in the world does not increase the amount you can buy with that new gold must decrease.

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"Austrian economics is tad stupid" is the more correct choice. Austrian economics does not correspond with reality and is rightfully marginalized and ridiculed by the vast majority of economists.

In the 19th century we thought of inflation as the change in ratio of money to goods. Inject more money in the economy without a commensurate increase in the amount of goods and you get inflation. Take money out of an economy and deflation occurs. Now we know this isn't really accurate. Inflation happens not when there is more money in the economy but when more money is competing for the same goods. If money just sits in a bank account (or virtual bank account in the case of Diablo III) it doesn't really affect the economy and no inflation occurs. There is the same economic activity but a few rows in a database somewhere contain larger numbers.

This is also why in the real world the fed can triple the size of the money supply without causing inflation. Of course the austrians predict, over and over again, that runaway inflation is going to happen Any Time Now. But it doesn't and it won't.

Of course in a completely healthy economy you would expect an increase in the money supply to lead to an increase in economic activity and inflation, because in a healthy economy people spend and invest the money they have.

Austrian economics is about digging gold up from the ground, then smelting it into ingots and then burying those ingots again in a vault somewhere. Only through this mystical process can you get Real Money. Otherwise the money is "fiat money". It's so silly.

>> This is also why in the real world the fed can triple the size of the money supply without causing inflation. Of course the austrians predict, over and over again, that runaway inflation is going to happen Any Time Now. But it doesn't and it won't.

What makes you so sure no runaway inflation will occur? Just because you haven't seen it yourself yet, it's unimaginable?

You're right about two things: inflation happens when more money is competing for the same goods, and increasing the money supply does not by definition cause inflation. The conclusion you are drawing ('the fed can triple the money supply without triggering inflation, and runaway inflation will never happen') doesn't follow from that though. Yes, all the money pumped in the economy is sitting on bank accounts right now, interest rate is near-zero and nobody is investing (throwing easy money at Wall Street for short time profits, jacking up the DJIA doesn't count as 'investing'). That's the sentiment right now. What do you think will happen when the economy picks up some steam, people get more confidence, and investments and consumption goes up?

The tricky bit about 'runaway inflation' is the 'runaway' part. You can only control inflation by very careful monetary policy, because economies are like oil tankers: they change direction very slowly, but if they start moving you can't stop them anymore. Runaway inflation doesn't occur when you increase the money supply, because when you are increasing the money supply, it's because the oil tanker has almost stopped, and you want to get it going. The question is what happens if it picks up too much speed further down the line.

Maybe you don't believe in dollar hyperinflation, but the observation that 'austrians predict runaway inflation over and over and it never happens' is simply wrong. It didn't happen for dollar, euro or yen, but it happened in Weimar, Zimbabwe, Urugay, Argentina, all within 100 years time.

> What makes you so sure no runaway inflation will occur?

Because when the economy picks up the Fed will decrease the size of the monetary base by selling treasury bills. The economy isn't going to pick up overnight (high unemployment, low demand, etc) so the Fed will have enough time to reduce the monetary base as needed.

Hyperinflation can happen, of course. But not through expansion of the monetary base in a liquidity trap. Austrian economists claim the opposite, and even go as far as saying that there is True Inflation, but that the gov't cheats in the way prices are measured. Again, completely silly.

Mainstream economics explains why inflation occurred in those countries. Those cases have been thoroughly studied and are mostly well understood.

>> Because when the economy picks up the Fed will decrease the size of the monetary base by selling treasury bills.

That's how it has always worked in the past: by extremely careful control of the money supply, through selling or buying treasuries. That's not what's happening right now. The FED is not just buying treasuries, but also RMBS, derivates, even shares, all at unprecedented scale, and all while keeping interest rates at near-zero. And let's not forget the billions of dollars used to 'save' banks: ultimately, the US government has to finance these by either raising taxes (not happening) or borrowing more from the FED, which means that effectively the 'bad loans' and their derivates that almost brought down these banks are also financed by an increase of the money supply.

Your assumption the FED can cool down the economy without completely killing it by huge interest rate hikes and sellof of US treasuries -throwing millions of people in unsurmountable debt and completely devastating all confidence in US treasuries as solid investments- as soon as the money velocity goes up and inflation starts to rise, is naive at best. Central banks around the world are very aware of the monster they are creating and the risk that it will lead to a world-wide currency devaluation war. Just read between the lines of public statements about Japan trying to devaluate the Yen, or China artificially keeping the Yuan as low as possible for years to protect their cheap export strategy.

>> Mainstream economics explains why inflation occurred in those countries. Those cases have been thoroughly studied and are mostly well understood.

While the factors that caused the monetary collapse in the countries I mentioned were different, the ultimate effects are comparable: an unmaintainable monetary status-quo leading in a loss of confidence in government-controlled currency. I'm not sure why you think 'This time is different (tm)' for the US, Europe, or Japan.

As an engineer with no background in economics, do you have any sources that discuss the pitfalls of Austrian economics from a layman’s perspective?

It seems nowadays that the internet is so rife with neo-Libertarians that it’s very difficult to find content discussing Austrian economics that is not biased towards it. I’d like to see a more balanced perspective, or at least a rundown of reasons why Austrian economics has failed to correspond with reality.

Everything by "Lorenzo", an Australian blogger:

http://skepticlawyer.com.au/author/lorenzo/

http://lorenzo-thinkingoutaloud.blogspot.com.au/

is a good starting point.

I have a Master's in Applied Math, and a Master's in Economics (educated by neo-Classicals).

Keep in mind the Austrians are not a monolithic movement, this article was published on the Von Mises Institute site, which has more to do with the Rothbardian strain of Austrians. Core to Austrian-Rothbardian theory is a system of a priori axioms and a repulsion to mathematic formulations and empirical validation, so the argumentation can end up being along the lines of "because I said so!"

The objection to mathematization comes from the belief that preference relations lead to a discontinuous utility curve, which the tools of differential calculus cannot crack (this is wrong, as a graduate-level mathematical analysis covering Lebesgue integration shows).

A more detailed neoclassical analysis of what's wrong with Austrian economics is Bryan Caplan's [Why I Am Not an Austrian Economist](http://econfaculty.gmu.edu/bcaplan/whyaust.htm).

And funnily enough, gold has almost never been the metal of value. For most of history, it's been silver:

http://skepticlawyer.com.au/2013/04/29/selenium-silk-spices-...

There is a difference between inflation and hyperinflation. Hyperinflation is not too much money or not enough money to spend. Hyperinflation is a loss of confidence in the currency (ie, people immediately exchange the currency for something real). Money’s component as a store of value is what prevents inflationary episodes from happening. Imagine, if everyone believed that whatever cash that they hold would lose 50% of purchasing power by the end of the year, they would more than likely go ahead and spend it now instead of when 50% of the value is lost. That's the nature of hyperinflation.

The other component necessary for hyperinflation is a competing currency. In Zimbabwe the locals switched to dollars when their native gov’t currency failed.

From the article: Most of the gold generated by the ruthlessly productive, rapidly adapting bots found its way to third party vendors in a black market which undercut the prices in the sanctioned, in-game auction houses.

You do not really need a competing currency as anything can be a store of value eg cigarettes or cars that is not the currency. But dollars are widely available globally and plenty fit in a planeload of $100 bills. I was in Brazil when they had around 40% a month inflation and you could buy dollars on any street corner and the black market rate was broadcast every day on the TV news.

I remember Zimbabwe when it was at its worst. The inflation was 30% - per hour. And the queues to the ATMs were loong.

Actually, a huge influx of gold probably would not affect our economy today that much, because the total amount of gold is quite small relative to the size of the world economy, and gold is not used as a currency anyway. It would obviously destroy the price of gold, though.

That's really one of the two main problem with inflation scare mongers: they don't usually talk about the scale of things. A gigantic influx of new money would certainly cause inflation. However, when the Austrians come out of their holes, one is usually talking about low single-digit percentages of GDP in spending, which is really not that much.

The second main problem of Austrian inflationistas is that they deny the possibility that economic production can increase in response to an increase in spending.

I think you're misunderstanding the point because it's badly stated. Basically they say that inflation happens when money increases but the things paid for with money do not. For the lattery they use specie as a proxy - you need the exchange rate between money and something to actually measure inflation, but specie is a somewhat confusing choice because it's often considered (and sometimes defined) to be money.

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