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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (830)	9/29/1998 9:58:00 AM
From: porcupine --''''>	Read Replies (3) \| Respond to of 1722

"I know that you are no fan of the Austrian school, ... " I wouldn't say that. I am a fan of their ideas. However, I will admit to not being a fan of their narrow fixation on those ideas, to the exclusion of all other considerations. That's how I look at any set of ideas. " ... but their writings on these international finance and credit cycle issues are [of the highest order]... " I'm inclined to agree. "The only problem is that it probably will take away many pre-conceived notions you may have about economics." My pre-conceived notions about economics are that markets are more efficient than bureaucrats (whether in governments or oligopolies) at setting prices and output -- in normal times. However, sometimes the times are not normal -- wartime being the most obvious example (and yet another reason to avoid having a war). Other than that, such pre-conceived notions about economics as I might have are not rigidly held -- they are subject to adjustment as realities warrant. "Mises was a true super genius ... [his book] could turn you into a less optimistic person than you are." There is a growing consensus that both optimism and pessimism, as well as other qualities of temperament, are genetically determined. There is always a "super genius" who can justify any temperamental disposition. For me, that genius is Milton Friedman. I remember well the mood during the Reagan recession of 1980 - 1981, the climax of a decade of stagflation. Right-wing loonies were stocking up on pork and beans in anticipation of the inevitable food riots to come. Ravi Batra's "The Great Depression of the 1980's" was a runaway bestseller. I saw Friedman in a television interview. At the end of the interview, Friedman predicted great things going forward for the U.S. economy. The interviewer was stunned, and so was I. At the end of the 80's, Batra's "The Great Depression of the 1990's" was a bestseller, though not to the same degree as his earlier work. There was alarm that skirted the boundaries of hysteria regarding the so-called "Asian invasion". Politically incorrect gallows humor had it that the Japanese would never again bomb Pearl Harbor -- because they already owned it. The Reagan recovery had shown only minuscule gains in productivity -- in spite of massive incurrence of indebtedness. The private sector was leveraged up to the hilt. Junk bonds had financed shopping centers in the desert, etc. There was a growing consensus among economists that government would be unable to employ fiscal tools to address the next recession (because it was out of credit), and unable to use monetary ones (because that would bring back stagflation). On the surface, at least, these arguments seemed to be irrefutably true. Around that time, a confidential study from a well known financial house happened to cross my path. The author argued that Germany and Japan would be going nowhere economically in the 1990's, and that the U.S. would reassert its global economic dominance. A colleague laughed out loud when he read it. I commented, "You never know." And that's what it boils down to. Neither Friedman nor the Austrian School, nor Greenspan, Rubin and Summers really know the future. Neither does porc. What is known is that for 200 years in the past, the U.S. has had 3 or 4 years of economic expansion for every year of economic contraction -- and that both optimists and pessimists have fared poorly in their attempts to predict which would be which. This not the only consideration, of course. But, for the investor with a 20 year or so time horizon, it is the most important consideration. All other considerations must be measured against this benchmark. "I think you will appreciate his love for free markets though." I do. I also appreciate the political Libertarians love of freedom. But, I also think they are too narrowly focused, and lack appreciation for the necessity of striking a balance between every individual's right to liberty and every society's obligation to maintain some semblance of order and continuity. The Austrian school has a similar tone of narrowly fixed focus. You will recall that in a recent Barron's interview conducted by Gene Epstein (8/24/98, p. 34), Milton Friedman wrote, "[In the 1930's, ... you had the Austrians ... saying you just had to let the bottom drop out of the world. You've just got to let it cure itself. You can't do anything about it. You'll only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. [3500 banks in the U.S. did fail, before Roosevelt was elected and intervened in the growing disaster. -- RR] I think by encouraging that kind of do-nothing policy both in Britain and the United States they did harm." I do not rigidly agree with Friedman, or anyone else, either. Friedman has been quoted as saying that Hong Kong's recent market intervention was "crazy". For the reasons he gave in the Barron's quote, I am not so sure that Hong Kong's administrators won't be viewed as being prudent in retrospect.