The Austrian View of "Destructive Inflationism"

I was struck last week by a question posed by CNBC’s Simon Hobbs to Marc Faber - investor, analyst and financial writer extraordinaire:  “In Steve Jobs’ new autobiography, Walter Isaacson talks about a conversation that he had with Rupert Murdoch, and Steve Jobs says that for commentary and analysis the axis today is not liberal versus conservative.  The axis now is constructive versus destructive.  Which side of that line do you think you fall on?”

I’ll assume that Mr. Hobbs sees Marc Faber residing more in the “destructive” camp – and I presume many would consider my analysis “destructive” as well.  We’re now in this strange and uncomfortable period of heightened angst, anger and vilification, whether it is in Athens, throughout Europe, or across the U.S. from New York City to Oakland, California.  European policymakers have been keen to blame short-sellers and speculators for their bond market woes.  The rating agencies are under attack on both sides of the Atlantic.  And analysts such as Mr. Faber and myself are generally viewed with contempt by those determined to view the world through rose-colored glasses.

From Websters:   “Destructionist:  One who delights in destroying that which is valuable; one whose principles and influence tend to destroy existing institutions; a destructive.”

I tend to view the recent use of “destructionist” in similar light to the vilification of the so-called “liquidationists” and “Bubble poppers” (a Bernanke term) from the spectacular “Roaring Twenties” boom and bust cycle.  There are those who believe that enlightened policymaking can implement an inflationary cycle and successfully grow out of debt problems.  And then there are others that see failed policy doctrine and Credit Inflation as the root cause of a dangerous dynamic that risks a catastrophic end.  Revisionist history has been especially unfair to Andrew Mellon and other “Bubble poppers” that warned of the impending dangers associated with the runaway monetary, Credit and speculative excess in the years immediately preceding the 1929 crash.

I am of the view that inflationary policy doctrine (“inflationism”) is in the process of impairing the Creditworthiness of the financial claims that constitute the foundation of the global financial system.  Massive issuance of non-productive debt and central bank monetization have irreparably distorted the global pricing of finance and the resulting allocation of financial and real resources.  This backdrop has nurtured destructive speculative dynamics.  From my perspective, it is the “destructionist” forces of “inflationism” that today pose grave risk to global Capitalism.  And, to be sure, the “socialism” of Credit risk is at the heart of the monetary and economic quagmires imperiling Europe, the U.S and nations around the world.

From Wikipedia:  “Destructionism is a term used by Ludwig Von Mises, a classical liberal economist, to refer to policies that consume capital but do not accumulate it. It is the title of Part V of his seminal work Socialism. Since accumulation of capital is the basis for economic progress (as the capital stock of society increases, the productivity of labor rises, as well as wages and standards of living), Von Mises warned that pursuing socialist and statist policies will eventually lead to the consumption and reliance on old capital, borrowed capital, or printed ‘capital’ as these policies cannot create any new capital, instead only consuming the old.”

From the “Austrian” perspective, runaway Credit booms destroy wealth instead of creating it.  There is as well an important facet of inequitable wealth redistribution that returns to haunt the system come the unavoidable bursting of the Bubble and the associated devaluation of “printed capital.”  I believe the current course of reflationary policymaking is doomed specifically because the ongoing massive expansion (inflation) of financial claims is not associated with a corresponding increase in capital investment and real wealth-creating capacity.  Governments around the world are – and will be in the future – required to issue massive amounts of new debt to sustain maladjusted financial and economic structures, in the processes prolonging wealth-destructive over-consumption and destabilizing global imbalances.  The “Austrians” use the apt analogy of consuming one’s furniture for firewood....

Read the rest at The Prudent Bear
Destructive, Destructionism And Inflationism

Commentary by Doug Noland

Noland summarizes the contemporary Austrian approach typified by economist Marc Faber. MMT assignment: Pick out the similarities and differences in the Austrian and MMT approaches to Minsky's Ponzi finance.