Wednesday, March 6, 2013


The one and only test of a claim of knowledge is the claimant's ability to predict. This is the first principle of science. Among other things, it completely refutes the claims of the "global warming / climate change" hucksters who are trying to persuade Americans to accept totalitarian control of our economy on the strength of the jiggered outputs of a few poorly designed simulations. But (also among other things) it's one of the reasons economics doesn't qualify as a science in the strict sense.

The economist's view of society is largely about trends. We can see trends in motion, and we can forecast trends to come in the broadest, most general fashion. What we can't do is predict future events in the exact sense, with minutely specific measurements and precise times of occurrence. That's why even the most successful economic theories, such as von Mises's Austrian theory and Friedmanite monetary theory, are never regarded as proven beyond all reasonable doubt -- and why unsuccessful theories such as Marxism and Keynesianism can hang around for centuries despite their many insufficiencies in practice.

We Austrians favor a theory of the business cycle that places causal emphasis on the role of currency inflation. A bounded inflation -- i.e., the creation of a significant volume of a fiat currency by the controlling agency, usually a government-controlled central bank -- doesn't have uniform effects in the short term. The new currency makes its way into the economy through government spending. Such spending initially pumps up the sales volume of vendors to the government. Only as those vendors spend their increased revenues do the effects begin to penetrate the broader economy.

In responding to such a surge of government purchases, a large part of a vendor's incremental expenditures will be on capital equipment, the better to meet the increase in demand. The balance of the incremental revenue will go out as wages to employees and dividends to stockholders. Thus, the second perceptible effects of the inflation will be on the makers of capital equipment: first, the sort needed by vendors to government, and after that, the sort required by the makers of consumer goods. This will naturally cause capital-equipment makers to ramp up production and increase capacity.

But in a "bounded" inflation -- a one-time "blip" of newly created currency -- government demand eventually returns to pre-inflation levels. Vendors to government will be compelled to idle the newly purchased capital equipment and lay off any newly hired workers. So the sharp rise in capital purchases that signaled the onset of the inflation is matched by a sharp decline in such purchases once government demand falls back to normal levels. As with the rise, the decline reverberates through the economy, ultimately reaching the makers of consumer goods. At the end of the cycle, there's a lot of idle capital equipment to be liquidated, and the value of the dollar has been reduced in proportion to its dilution.

"Bounded" inflations are always followed by recessions / depressions. Our federal fiscal policy makers are aware of this, which is why they continuously inflate the currency, in the hope that by "keeping the pedal to the metal," they can keep the economy running at full speed.

Unfortunately, it's a forlorn hope, as is every attempt to control a system through positive feedback. But that's a topic for another day. Today's little disquisition focuses on this announcement from Chemung County, New York:

HORSEHEADS, N.Y. -- A local manufacturer is announcing layoffs. Eaton Corporation has informed employees at its Horseheads plant that 33 jobs will be cut at the start of next month.

The company employs 275 people at that facility, where they manufacture vacuum interrupters.

Officials blame the layoffs on the challenging business climate. They have an Employee Assistance Program and will be bringing in representatives from the Department of Labor to help the affected employees.

(Applause to Purp at Ace of Spades HQ for bringing this to our attention.)

Vacuum interrupters, to skip all the interesting engineering details, are a critical electrical component required for any sort of medium to heavy manufacturing. New factories need them; existing factories must replace them now and then. A decline in purchases of vacuum interrupters thus correlates closely with a decline in medium to heavy manufacturing. If Austrian business cycle theory is correct, this is a harbinger of a recession in the immediate future.

The American economy is not a closed system. Indeed, quite a lot of the capital equipment made here is sold to factories in other nations, where the consumer goods so ardently demanded by Americans are made. America's share of the world capital-equipment market is quite large. Estimates, as always, vary, but they average around 50% of total world production. Once again, if Austrian theory is correct, a decline in capital equipment manufacturing here in the United States foretells a global recession, not merely a national one. The status of the American dollar as the world's reserve currency only reinforces that conclusion.

The Federal Reserve Bank has kept interest rates unnaturally low for several years, supposedly to "stimulate the economy." As poorly as that has worked, it appears to have had the results predicted by Austrian theory, at least as regards the initial surge in capital expenditure by vendors to government and the decline taking place today. Eaton's reduction of its workforce in Chemung County, where vacuum interrupters are made, strikes me as more significant than persons other than the laid-off workers would usually deem it.

Attention to such developments will become ever more important as the consequences of Obamunist economic policies continue to unfold. Watch this space.


  1. This would seem to rather seriously undermine the Austrian case that the business cycle is a phenomenon of purely monetary origin, given that our monetary policy has not meaningfully changed and shows no realistic sign of meaningful change in the foreseeable future.

    That which cannot go on forever will, of course, eventually stop. But there is no reason to suppose that the Fed lacks the _ability_ to continue inflating the currency at approximately the present rate forever. (Of course, doing so has negative consequences for folks dependent on the value of the dollar, which one way or another encompasses most of the human race these days...but that concern has never stopped the Fed before, and there's been no sign that it's going to start restraining them in the future either.)

  2. "Once again, if Austrian theory is correct, a decline in capital equipment manufacturing here in the United States foretells a global recession, not merely a national one."

    That's IF Eaton Corp is the only supplier rather than a company being put out of business by another supplier doing things a bit better, a bit faster, a bit cheaper.

    I'd think it's total US production of vacuum interrupters that counts, right?

  3. Warren Buffet and other billionaires are dumping stocks, particularly in the consumer goods arena like Kraft, Sara Lee, etc.

    I'm wondering if I should dump what stocks I still have that are centered in oil and gas.

    The problem with these stocks (or any) is not that demand for oil and gas and transport (pipelines) will decline so much, but that profit margins will be squeezed to the point there is no dividend in owning them, thus lowering the stock price since who wants to own shares of a company that's doing huge business but not making any net profit?

    Where to put the money, though? Bonds are no good. Commodities like gold and silver? Well, it turns out that the commodities market is a rigged game when it comes to gold and silver right now.

    People can make money shorting the Market, but I'm not that kind of investor. It's not something I know how to do or could trust.

    I probably should have invested in guns and ammo companies, but that horse is out of the barn.

    I am flummoxed as of what to do.


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