Peter Schiff is Wrong __ James Turk is Wrong

Austrian Economics is Wrong

Monetary Inflation is not the same as Price Inflation!

         Indeed, the Monetarists and the Austrians believe that inflation of prices is simply an automatic manifestation of overly abundant money. Money supply and prices are supposedly inextricably linked by mathematics, such as in the equation known as the Quantity Theory of Money. To be sure, you'll see the Quantity Theory of Money in every Economics textbook, expressed as some variant of P(k)=MV. [Read this equation as: "the general price level (P) is proportional to the size of the money supply (M) times the velocity of money (V)."] In other words, according to the Quantity Theory, if you increase the money supply by say, 25%, while holding its velocity constant, then prices on average must also rise 25% in order to maintain a supposed equilibrium. As neat and orderly as this theory assumes the economic universe to be, it is simply not true. It is but a theory.

         Although Peter Schiff and certain Austrian economists talk a very convincing talk, they are dead wrong on several fronts. Their key tenets stem from faulty premises which they stubbornly refuse to reconsider. Their conclusions follow from simplistic and unrealistic half-truths. For example, consider the catchphrase, "You can't spend your way to prosperity." It is half-true, because for an individual, spending will indeed reduce rather than increase his/her own wealth. But for a whole economy it's a very different story. One consumer's spending is a zero-sum wealth transfer in terms of the whole (since the spending of one party is always revenue to another party). It’s a wash. Total spending equals total revenue (ignoring taxes & entitlements), and so as total spending goes up, total revenues go up in lockstep. Spending and revenues are really like two sides of the same coin.

         Consider that if all spending were to cease, then all revenues would also cease. No spending by anyone would mean no income for anyone, and then there would be no economy. Prosperity would of course be impossible. For the whole, then, consumer spending acts as essential to prosperity by enabling its flip side—income. And spending is also what entices further production. For example, a retailer may initially stock a certain amount of a product, but will not order any more of it until the product has been selling. Consumer buying is thus essential to support jobs in goods manufacturing. There is no question that consumer spending's flip side is revenue (income) and that consumer spending also boosts both production and employment. So why does a guy like Peter Schiff keep saying that consumer spending is bad for the economy and that investing/saving is good?

         Saving rather than spending is good for the individual, yes, but people parking money in savings is detrimental stagnation for the economy as a whole. (These pundits fail to see such distinctions.) It's no coincidence that since the 2008 crises, just as we've had the weakest economy in generations, record amounts of cash have been idly 'sitting on the sidelines' on corporate balance sheets, in bank reserves, and in Americans' portfolios.

         Austrian economics is enjoying so much resurgence these days that Mises and Hayek are actually now on the lips of several candidates in the 2012 election cycle. But don't be fooled. Austrian economics misleads because it is based upon plausible-sounding half-truths. Bottom line: the overwhelmingly likely future inflation scenario is that average consumer prices will continue to rise only in the single digits for many years to come. This is despite trillions of 'money printing' by the Fed being quite likely. I personally think it's even highly probable that consumer prices will average low single digit inflation, i.e. below 5.5%, over the next 5 years and beyond. That would mean, on average, goods and services will cost at the most about one third more than they do today by November of 2016. Copy the URL for my website into your google calendar a year or two out as a reminder to check back for new articles and updates—I'll see you then!